CNSX:CL is a Buy, says Haywood

The past two years have been beyond tough for cannabis stocks, but investors still have some good-looking names to pick from. For Haywood Capital Markets analyst Neal Gilmer, that list includes US-based Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL), which Gilmer thinks is heading towards a growth spurt. That is, once a major merger between Cresco and fellow US multi-state operator (MSO) Columbia Care gets completed.

Gilmer delivered an update to clients on Cresco Labs on Tuesday where he reiterated a “Buy” rating on the stock while lowering his target price from C$6.25 to C$4.50, saying an adjustment in his forecast for CL is cause for the target drop.

Headquartered in Chicago, Cresco Labs has operations in ten US states including 21 cultivation and processing facilities and 64 dispensaries under the Sunnyside brand. The company has the #1 market share position in Illinois, Pennsylvania and Massachusetts.

Cresco reported its fourth quarter 2022 and full year financials last month, with 2022 revenue increasing by three per cent year-over-year to $843 million, a new record for the company. Adjusted EBITDA was $174 million and the company’s net loss for the year was $215 million including $141 in one-time impairment charges. (All figures in US dollars except where noted otherwise.)

In his report, Gilmer focused on management’s outlook for 2023, which included a more muted view of the now-completed first quarter. Gilmer noted that Cresco expects the Q1 to be down sequentially, with growth to pick up in both its wholesale and retail channels beginning in Q2. 

“Efforts taken to improve overall efficiencies across its footprint should offset the pricing pressure in certain markets,” Gilmer wrote.

On the Columbia Care merger, Gilmer noted that the two companies have agreed to extend the closing window for the transaction to June 30, 2023, with two material divestitures still to come in Ohio and Florida and a third outstanding in Maryland.

Gilmer said once the deal is closed, the combined company will have access to every major adult-use cannabis market in the United States.

By the numbers, Gilmer is now calling for Cresco Labs’ revenue to go from $842.7 million in 2022 to $829.5 million in 2023 and to $923.6 million in 2024. He sees Cresco’s EBITDA moving from $173.6 million in 2022 to $166.8 million in 2023 and to $200.5 million in 2024. At the time of publication, Gilmer’s new C$4.50 target represented a projected one-year return of 131 per cent.

“While we have made a substantial adjustment to our estimates, we do believe the closing of the Columbia Care transaction will unlock new growth opportunities and further efficiencies. We await further clarity on divestitures and confirmation on closing prior to including the acquisition in our estimates,” Gilmer said.