ATB Markets analyst Kenric Tyghe is caught up with US multi-state cannabis operator Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL), maintaining an “Outperform” rating and target price of C$25.00/share on the company in an update to clients on September 23.
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 medical and recreational markets.
Tyghe’s latest analysis comes after Cresco announced the execution of an agreement to acquire full control of Pennsylvania-based Bay, LLC, otherwise known as Cure Penn.
“The acquisition will increase profitability in the state, on scaling and increased owned brand at retail penetration, and by further strengthening the Company’s existing wholesale market leadership position,” Tyghe said of Cresco’s Pennsylvania prospects.
The acquisition, valued at $90 million to be paid in cash and shares, gives Cresco Labs three additional Pennsylvania dispensaries in Lancaster, Phoenixville, and Philadelphia, with additional plans to open two more dispensaries before the end of 2022 to give the company nine in the state. (All figures in US dollars except where noted otherwise.)
“As we implement localization strategies tailored to state level dynamics, this Transaction with Cure Penn is expected to expand our retail footprint in Pennsylvania, increase profitability, and strengthen our wholesale leadership position in the state. We’re thrilled to continue executing our playbook of achieving depth in strategic markets via rigorous capital allocation,” said Charlie Bachtell, CEO and Co-Founder of Cresco Labs in the company’s September 23 press release.
“The Cure Penn team has developed a high-performing retail platform across three dispensaries that sets up another immediately accretive acquisition for Cresco Labs. We’ve proven our ability to drive incremental top and bottom-line growth from the implementation of Sunnyside’s best-in-class operating model, and we look forward to growing our house of brands which are already among the most sought after by patients in Pennsylvania,” Bachtell said.
The move is the latest in the company’s growth plan, having completed the acquisition of Cultivate Licensing and BL Real Estate for $90 million plus another $68 million in potential earnouts earlier in September, adding another 42,000 square feet of active flowering canopy with room for expansion beyond the 64,000 total square feet of canopy the company has in the state, as well as three operational dispensaries located in Leicester, Framingham, and Worcester.
The company also announced its intent to acquire Blair Wellness, a 6,500 square foot medical cannabis dispensary based in Baltimore, Md.
Cresco also expanded its operations in Florida, opening its first Sunnyside brand dispensary in Fort Lauderdale, giving the company nine total locations in the Sunshine State.
Tyghe believes the company is going to continue its growth, forecasting Cresco’s 2021 revenue to be $870.7 million, marking a potential 82.8 per cent year-over-year increase before a projection to break 10 figures in 2022, forecasting revenue of $1.25 billion to mark a potential year-over-year increase of 43.1 per cent.
Tyghe also expects the company’s EBITDA to keep climbing accordingly, as his 2021 projection of $223.6 million would represent a potential year-over-year increase of 268 per cent while posting a margin of 25.7 per cent. 2022 also projects as a promising EBITDA year from Tyghe’s perspective, as his forecast of $406.4 million in EBITDA would be a potential 81.7 per cent year-over-year increase, as well as an increased margin of 32.6 per cent.
Accordingly, Tyghe’s valuation metrics paint a strong picture for the company, with the EV/Sales multiple forecast to drop to 5.2x in 2021 from its previous 9.6x from 2020, then anticipating another drop to 3.7x in 2022. The EV/EBITDA multiple projections follow a similar path, falling heavily from the reported 75.1x in 2020 to a projected 20.4x in 2021, then to a projected 11.2x in 2022.
Meanwhile, with Tyghe projecting the company’s EPS to go positive in 2021 at C$0.09/share, his 2021 P/E ratio projection is set at 119.9x before tumbling to a projected 24.4x in 2022.
Off the back of strong financial results and the ability to capitalize on current market dynamics in key high growth states, Tyghe believes Cure Penn will only serve to bolster the company’s growth efforts moving forward.
“We consider the acquisition of Cure Penn to be positive for our thesis, given it provides immediate further retail scale and related benefits through an accretive acquisition, in what is a very important market for Cresco,” Tyghe said.
Overall, Cresco Labs’ stock price has dropped by 11.9 per cent over the course of the year, with its high point being $21.40/share on February 10. At the time of publication, Tyghe’s C$25.00 target represented a projected 12-month return of 127 per cent.