Cresco Labs is a Buy in US cannabis, says Beacon

The stock has fallen hard over the past year but Beacon Securities analyst Russell Stanley is keeping the faith on Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL), as he maintained a “Buy” rating but reduced his target price from $17/share to $15/share for a one-year projected return of 183 per cent in an update to clients on Wednesday.

Based in Chicago, Cresco Labs is a vertically integrated cannabis company with cultivation, manufacturing and dispensary/retail facilities in the United States. In total, Cresco has operations in ten states, including 20 production facilities and 44 dispensaries.

Stanley’s latest analysis comes amid an ongoing legal battle in Illinois surrounding the release of additional licenses in the state.

“As discussed in similar updates for MSOs that are major players in Illinois, the lawsuits preventing the release of those additional retail licenses appear set to extend longer than we had expected,” Stanley said.

Illinois already has approximately 110 adult-use retail stores, with total adult-use sales totalling $132 million in April alone.

Last summer, the state awarded an additional 185 licenses through a lottery process, with Cresco already being in a prime position on account of having three of the 21 originally licensed cultivation and manufacturing facilities, each allowing for up to 210,000 square feet of canopy, while only one other operator in Illinois has more than one.

“We therefore view CL as particularly well positioned to benefit from the expansion of the wholesale market that would follow the release/development of additional retail licenses, given its runway for cultivation expansion,” Stanley said. “However, we expect sales in Illinois to be relatively flat, give or take the impact of seasonality/holidays, until the state issues additional retail licenses.”

The news out of Illinois has prompted Stanley to make slight changes to his financial projections for Cresco Labs, though he maintains a revenue projection of $918 million (all report figures are in US dollars) for a potential year-over-year increase of 11.7 per cent. Stanley then forecasts Cresco to break into 10 figures in 2023 at a projection of $1.85 billion for a year-over-year increase of 101.9 per cent.

Notably, Stanley’s 2023 projection is the only one out of the Cresco coverage universe that factors in a full year of contributions from Columbia Care, a transaction Stanley expects will close by the end of the fiscal year. As a result, the consensus forecast is much lower for 2023, with a projection of $1.15 billion.

From a valuation perspective, Stanley forecasts the company’s EV/Revenue multiple to drop from the reported 3.7x from 2021 to a projected 3.3x in 2022, then to a projected 1.7x in 2023.

Meanwhile, Stanley maintains a $243 million adjusted EBITDA projection for 2022 to imply a margin of 26.5 per cent. However, because of the ongoing Illinois legal issues, he has reduced his 2023 EBITDA forecast from $620 million to $550 million to imply a margin of 29.7 per cent.

In terms of valuation, Stanley forecasts the company’s EV/adjusted EBITDA multiple to drop from the reported 15.8x in 2021 to a projected 12.6x in 2022, then to a projected 5.6x in 2023, which represents a 21 per cent discount to the 7.1x average amongst CSE-listed US operators.

Looking ahead, Stanley cited a few potential catalysts for Cresco, including the release of its financial results for the first quarter of 2022, further updates pertaining to buildout and additional M&A activity.

Cresco’s stock price has dropped off by 35 per cent since the start of 2022, and is presently trading at $5.36/share, its lowest point in two years, after peaking at a 2022 high of $9.76/share on February 16. However, Stanley believes the stock’s momentum is negative and could drop into a range between between $4.45/share and $4.65/share as the RSI has shifted into oversold territory.

Despite the hold-up on additional licenses in Illinois, Cresco has continued to grow its presence in the state by launching the FloraCal Farms line of curated flower, live rosin vape and live rosin concentrates in its Sunnyside outlets in Illinois, with other retailers added prior to the 420 cannabis holiday.

“FloraCal Farms’ vision is to deliver a first-class experience to sophisticated cannabis consumers who value unique terpene profiles, flower structure and all the fruits of artisanal cultivation and processing methods,” said Charles Bachtell, CEO & Co-Founder of Cresco Labs in the company’s April 13 press release. “We plan to launch FloraCal Farms in other markets throughout the year to reach the ultra-premium shopper. Along with our Cresco and High Supply brands, our uniquely designed portfolio architecture of tiered inhalable offerings and pricing will allow us to offer a variety of value propositions for consumers and to compete incredibly well in the marketplace.”