Cresco Labs is a Buy, says Beacon Securities

Look for third quarter revenue to be flat from US cannabis name Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL). That’s according to Beacon Securities analyst Russell Stanley, who on Monday gave a preview of Cresco’s upcoming Q3, saying the stock still trades at a discount to its peer group.

Chicago-headquartered Cresco is a vertically-integrated cannabis company with operations across ten states and has the largest branded wholesale business in the United States where it ranks #1 in wholesale in Illinois, Pennsylvania and Massachusetts. 

Ahead of third quarter results due on Tuesday morning, Stanley said he’s expecting revenue of $214 million, which compares with $215.5 million generated a year earlier and $218 million for the previous quarter. Adjusted EBITDA is expected to come in at $47 million compared to $56.4 million a year ago and $51 million for the previous quarter. The consensus calls are for Q3 revenue of $210 million and EBITDA of $47 million. (All figures in US dollars except where noted otherwise.)

Stanley said the wholesale market in the US is currently under pressure and many participants have been shifting their focus to retail sales of their house brands, thus weakening wholesale demand, a result which the analyst expects to hinder Cresco over the immediate term.

At the same time, Stanley said Cresco is well-positioned in the state of Illinois, where the company has three of the state’s only 21 original cultivation and manufacturing licenses, and, recently, Illinois released 185 new adult-use retail licenses, which likely means more support for wholesalers in the state.

Stanley said there should be wholesale growth in Illinois (population 12.7 million) of 168 per cent with the new store openings.

“We will be interested in managements comments with respect to visibility on store openings and the associated increase in wholesale demand that should benefit CL,” Stanley wrote, in reference to Tuesday’s third quarter conference call. 

“We will also be interested in management’s outlook for adult-use legalization in Pennsylvania (pop. 12.8 million). Last week, Maryland voters approved an adult- use legalization measure, so PA is now bordered to the north, east and south by states that have legalized or are implementing legalization,” he said.

On comps, Stanley estimates Cresco to be currently trading at 6.6x his 2023 EV/adjusted EBITDA forecast, which represents an 11 per cent discount to the 7.4x average among CSE-listed US cannabis operators.

With the update, Stanley reiterated a “Buy” rating and C$11.00 target price, which translates to a projected one-year return of 147 per cent.