Cresco Labs is a pass, says Echelon

It’s still a “Hold” on US cannabis name Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL), according to Echelon Capital Markets analyst Andrew Semple, who reviewed Cresco’s latest quarterly results in a Wednesday report.

Chicago-headquartered Cresco Labs announced its first quarter 2023 financials on Wednesday, with revenue of $194 million coming in down three per cent sequentially and down nine per cent year-over-year. Management said softening of the market in Illinois caused the sequential decline. (All figures in US dollars except where noted otherwise.)

The company opened eight Sunnyside stores in Florida and Pennsylvania over the quarter, taking its nationwide store count to 63, and Cresco said it retained the #1 market share position in Illinois, Pennsylvania and Massachusetts top markets and a top five share position in Michigan.

CEO Charles Bachtell said in his commentary that he attended the first ever US Senate hearing on the SAFE Banking Act and was encouraged by the progress at the federal level to resolve the banking challenges US cannabis companies continue to face. 

“We are investing wisely and rationalizing and optimizing everything we do to generate profitable revenue expansion, drive healthy margins, generate more cash and strengthen our balance sheet. At Cresco Labs, we’re optimizing for the company we are today while also preparing for the industry of tomorrow,” Bachtell said in a statement.

The Q1 results were softer than expected, according to Semple, with the $194.2 million topline arriving in-line with his estimate at $195.8 million and the consensus at $192.5 million. Adjusted EBITDA at $29.3 million was below Semple’s estimate at $30.2 million as well as the Street at $32.4 million.

Semple reiterated a “Hold” on Cresco while lowering his target from C$3.00 to C$2.75 per share, representing a projected return of 6.2 per cent.

“We prefer to remain tactfully to the sidelines with our rating since the Company will likely continue to have some ongoing noise in its financial results asset closures undertaken in H123, as well as potential risk that divestitures from the Columbia Care transaction could fall short of prior expectations,” Semple wrote.

“We see other opportunities for potential upside to our forecasts and valuation. We continue to exclude Pennsylvania, Ohio, Florida and New York’s adult-use programs in our financial forecasts and valuation model as we await regulatory updates from those states. We believe adult-use sales in New York will likely become a meaningful contributor to Cresco’s financial performance and our valuation once the Company is allowed to launch adult-use sales in the state. Our H223 forecasts now include the launch of adult-use sales in Maryland, but under conservative assumptions,” he said.