Cresco Labs is bulking up, says ATB Capital

Despite the pullback across the sector, ATB Capital Markets analyst Kenric Tyghe is staying positive on US cannabis company Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL), maintaining an “Outperform” rating on the company in an update to clients on Thursday.

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

Tyghe’s latest analysis comes after the company announced it had entered into an agreement to acquire Laurel Harvest Labs, a Pennsylvania-based vertically integrated cannabis operator.

“Cresco, which according to Headset data, was the number one selling brand in Q3/21 in Pennsylvania, will be even better positioned to leverage its brand awareness and penetration at retail, on the addition of both new doors and increased (newly constructed) cultivation capacity,” Tyghe said.

The acquisition, at a price of $80 million (all report figures in US dollars except where noted otherwise) expected to close in the fourth quarter of 2021, will see Cresco add the entirety of Laurel’s operation to its portfolio, including one operational dispensary, another under construction and the potential to add another four dispensaries in the future, as well as a 52,000 square foot cultivation facility in Lancaster County, with further expansion plans already in place.

Cresco’s move to acquire Laurel further expands the company’s presence in Pennsylvania, where Cresco just completed the $90 million acquisition of Cure Penn, which included dispensaries in Lancaster, Phoenixville and Philadelphia, with additional plans to open two more dispensaries before the end of 2022.

“As the medical market continues to grow and as legislators develop plans for adult-use, we are increasing our depth in the key state of Pennsylvania to strengthen our wholesale leadership while growing profitability and scale through new retail. This acquisition will provide Cresco Labs with immediate incremental cultivation capacity, simplify our ability to expand production capacity further, and add six additional retail dispensary permits in the state,” said Charlie Bachtell, CEO of Cresco Labs in the company’s October 14 press release.

The company’s Pennsylvania acquisition continues a recent aggressive push on overall acquisitions for Cresco, which recently completed the acquisition of Cultivate Licensing LLC and BL Real Estate LLC for $90 million plus another $68 million in potential earnouts in September, along with Baltimore-based cannabis dispensary Blair Wellness, as well as opening its first Sunnyside brand dispensary in Fort Lauderdale to give the company nine total locations in the state.

More recently, the company announced it would exit agreements under which Cresco Labs served as the exclusive distributor of certain third-party branded products in California.

Tyghe believes the company is going to continue its growth based on his August 13 financial projections, 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 $0.09/share, his 2021 P/E ratio projection is set at 119.9x before tumbling to a projected 24.4x in 2022.

With the potential for the legalization of adult-use cannabis in late 2022 and a potential run rate of $1.2 billion, Tyghe believes Cresco is making smart plays to improve its place in the Pennsylvania market. 

“We consider the overlay of the Laurel Harvest acquisition (in quick succession following the Cure Penn acquisition) as positive, and supportive of our thesis,” Tyghe said. “While Pennsylvania is going through a bit of a rebalancing, it is a key catalyst state through our forecast window, and one in which Cresco is very (and increasingly) well positioned.”

Overall, Cresco’s stock price has dropped by 21.9 per cent over the course of the year, maintaining a steady decline from its high point of $21.40/share on February 10, recently bottoming out at $10.20/share on October 8. With his reiterated “Outperform” rating, Tyghe has maintained a target price of $25.00/share which at press time suggested a one-year return of 127 per cent.