Cresco Labs is still a buy, this analyst says

Cresco Labs (Cresco Labs Stock Quote, Chart, News, Analysts, Financials CSE:CL) is well-positioned to complete its debt refinancing and resume growth initiatives, Beacon Securities analyst Russell Stanley said Aug. 11. He maintained a “Buy” rating and C$1.75 share price target after the company reported second-quarter Adjusted EBITDA that beat the highest street estimate.

Stanley said margins were much stronger than expected in Q2. However, he cautioned that the second half of the year could be more challenging as the company ramps up additional cultivation capacity.

“Importantly, the company is poised to complete a $325M debt refinancing, which will make it the first of the four major multi-state operators to address a significant 2026 maturity, and free up to time/resources to focus on growth,” Stanley said. “We also view management’s comments re: M&A to be the most bullish we heard from the major MSOs during last week’s earnings releases.”

Cresco reported second-quarter revenue of $164-million and Adjusted EBITDA of $41-million, ahead of Beacon Securities’ forecast of $161-million and $32-million, and above consensus at $162-million and $33-million. Adjusted EBITDA also topped the highest street estimate of $39-million. Revenue was slightly stronger than expected, after management had predicted a small sequential decline from $166-million in Q1.

The 11% year-over-year revenue drop reflected ongoing price compression and increased competition in Illinois, Pennsylvania and Florida, partly offset by the launch of Ohio’s adult-use market in August 2024. Adjusted gross margins beat Beacon’s forecast by 527 basis points, rising 124 basis points quarter over quarter but still down 186 basis points from a year earlier.

“During its conference call, management noted Q2 GMs were aided by a couple of favourable items that are not expected to recur, with lower-COGS product sold through in Illinois,” Stanley said. “The GM strength drove the 529 adj EBITDA margin beat, with Cresco showing q/q margin improvement for the first time since Q2/24.”

The company generated $15-million in operating cash flow before working capital in Q2, ahead of Beacon’s $10-million forecast. The company still made a $6-million net investment in working capital despite a sequential revenue decline, resulting in $9-million in cash from operations versus Beacon’s $12-million forecast.

Cresco ended the quarter with $147-million in cash, down from $155-million in Q1. Operating cash flow of $9-million was offset by $15-million in capital spending and $3-million in financing activity. The company recently secured commitments for a new five-year, $325-million senior secured term loan at 12.5% interest to repay its $360-million credit facility due August 2026, which carries no prepayment penalty.

“Management noted that the new facility provides added flexibility, including the option to prepay $125M at a reduced prepayment premium,” Stanley said. “The refinancing is expected to close on-or-about August 13th. Amongst the four major MSOs with a significant debt maturity over the next 18 months, Cresco is poised to be the first to complete the associated refinancing.”

He said that with the debt refinancing nearly complete, Cresco can shift its focus back to growth.

“During its conference call, management noted that tough operating and regulatory environments are forcing many smaller/more levered operators to downsize, and that Cresco is seeing a growing number of acquisition opportunities,” Stanley said. “The company also conceded that its current core markets continue to become more competitive, adding further incentive to expanding the footprint. While management noted it will be patient and disciplined, we view the company’s M&A commentary as the most bullish we heard amongst the major MSOs this past earnings season. Potential new markets include Maryland, New Jersey and Connecticut, while the company could add operations in existing markets.”

Stanley expects Cresco to post $151-million in Adjusted EBITDA on $660-million in revenue in 2025, rising to $176-million on $720-million in 2026.

-30-