Cresco Labs has a 34 per cent upside, says Echelon

Echelon Capital Markets analyst Andrew Semple maintains a solid outlook on Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL), reiterating his “Buy” rating and target price of C$18.00/share in an update to clients on August 13.

Founded in 2013 and headquartered in Chicago, Cresco Labs is a vertically-integrated cannabis company with operations in ten states and a particular focus on the product manufacturing, branding and distribution of cannabis products to the medical and recreational markets.

Semple’s most recent update comes after Cresco Labs reported its second quarter 2021 financial results, with Semple taking a positive view of the outcome.

Cresco Labs reported revenue of $210 million, good for a 122.8 per cent year-over-year increase and 17.7 per cent compared to the previous quarter. The topline beat the consensus projection of $196 million as well as Echelon Capital’s projection of $201.8 million. Retail sales accounted for $101.3 million in revenues (48 per cent of the revenue mix), marking a 22.3 per cent increase from the previous quarter, bolstered by the acquisition of Florida-based vertically integrated cannabis producer Bluma Wellness.

The company’s gross profit margin also experienced a spike as it finished the quarter at $107.7 million (51 per cent margin), a 22 per cent quarter-to-quarter increase and a 233 per cent year-over-year improvement. Meanwhile, the company’s adjusted EBITDA came in at $45.5 million, a 30.1 per cent quarter-to-quarter increase and a 176 per cent year-over-year improvement, establishing a margin of 22 per cent.

Cresco said it has reworked its debt structure, doubling the size of its credit facility with lenders to $400 million, meaning Cresco will have an additional $200 million of incremental gross proceeds to accelerate capex investment. The company also lowered the coupon rate to 9.5 per cent from 12 per cent (12.0 per cent previously) on the facility while extending the maturity from January 2023 to August 2026.

“This much lower coupon rate meaningfully reduces the Company’s cost of capital and the longer timeline to maturity allows Cresco to confidently invest the cash raised to drive long term growth,” Semple said in his update. The analyst noted that the additional cash will likely be used on expansion efforts in Florida, Pennsylvania, and New York, which Semple views as likely being the largest expansion project after the state legalized adult-use sales, as well as expanding the medical cannabis market by approving dried flower sales.

“Q2 was a strong quarter of head down execution at Cresco Labs and once again we are hitting our stride as we enter the next phase of growth. During the quarter we continued to invest in infrastructure, operationalized new assets, and deployed our proven playbook to build top positions in the most important U.S. cannabis markets,” said Charles Bachtell, Co-Founder and CEO of Cresco Labs in the company’s August 13 press release.

“We are very proud of the record performance this quarter, driven primarily by organic growth, and we’re even more excited about what lies ahead as we begin recognizing contributions from growth initiatives initiated over the last 18 months. We remain dedicated to our differentiated strategy and continue to lay the foundation for long-term leadership in the U.S. cannabis industry,” he said.

Semple predicts continued growth in the second half of 2021 for Cresco Labs, with projections of $227.9 million in revenue with $55.9 million in adjusted EBITDA for the third quarter, followed by $261.2 million in revenue with $69.6 million in adjusted EBITDA for the fourth quarter, leading to estimates of $877.5 million in revenue and $206.1 million in adjusted EBITDA for the 2021 fiscal year, representing 84.3 per cent and 77.7 per cent year-over-year increases for each respective value.

Semple’s projections also have Cresco Labs crossing the $1 billion revenue threshold in 2022, with a projection of $1.207 billion representing a potential 37.6 per cent year-over-year increase, while the forecasted adjusted EBITDA of $349.6 million would mark a potential 69.6 per cent year-over-year increase.

Cresco Labs also shows well in Semple’s valuation data, as he projects the EV/Sales multiple to drop to 5.1x in 2021 from the reported 9.5x in 2020, then dropping again to 3.7x in 2022, with all figures coming in below the targets of 12.8x in 2020, 7x in 2021, and 5.1x for 2022. The EV/EBITDA multiple projections show a similar picture, with Semple projecting a drop from the reported 38.9x in 2020 to 21.9x in 2021, followed by another forecasted drop to 12.9x in 2022, with all multiples again coming in below the targets (52.7x in 2020, 29.7x in 2021, 17.5x in 2022.)

“We raise our sales forecasts for the remainder of 2021 on the stronger-than-expected sales growth in Q221. We believe the Company’s improving retailbusiness – with sales per store metrics that lead the peer group – underpins high visibility revenue ahead, while substantial investments into increasing production capacity offers torque to H221 revenue growth. We continue to be confident in our above-consensus 2021 and 2022 sales estimates as Cresco delivers solid revenue momentum,” Semple wrote.

“We tweak higher our gross margin estimates on expectation that facilities not yet in operation will begin commercial activities and offset some of the negative margin impact from costs being generated without offsetting revenues. Some of this upside to margins is offset by our expectation that the revenue mix shifts away fromIllinois/Pennsylvania, where the Company’s massive scale and vertical integration produces margins that aredifficult to replicate elsewhere,” he said.

Semple’s C$18.00 target for Cresco represented at press time a projected one-year return of 34.1 per cent. Overall, Cresco share price is down six per cent for the year to date, reaching a high point of C$21.40/share on February 10.