The Analyst
Following Cresco Labs’ (OTC:CRLBF) (CSE:CL) conference call, Pablo Zuanic, from Cantor Fitzgerald kept an "Overweight" rating and maintained a 12-month price target of $19.
“We will not update forward quarterly estimates until SEDAR is out (expected tomorrow),” Zuanic wrote in his analyst note dated May 18, 2022.
“1Q22 sales of $214 million were down 2% sequentially (retail +2%, wholesale -6%), but in organic terms (adjusting for the full of assets acquired in Pennsylvania during the fourth quarter). On a weighted average basis, we estimate the company’s markets fell 2% sequentially,” added the analyst.
The Thesis
Zuanic explained Cresco’s adjusted gross margins fell 180bp sequentially to 52.6% and EBITDA margins dropped 250bp to 23.7%. “Increased price competition in key markets (MA was called out) and continued macro pressures, explain the 1Q performance,” Zuanic said.
The analyst noted the company is guided for muted growth for 2Q but is confident that expanded assortment (new formats in FL; IL and other states), as well as efficiencies, should lead to growth in the second half of 2022.
“Cresco still expects to close the Columbia Care deal (plus entry into 8 new states including NJ/VA), and projects eight states by CY23 generating over $100Mn in revenue each. Regarding deal disposals (it projects to raise $300-400Mn), it said it will need to divest assets in IL, PA, OH, FL, and MD,” Zuanic said.
With the sector at historical lows, Zuanic said he prefers investing in the larger MSOs that have developed a competitive “moat” (breadth, depth), have a solid financial position, and a healthy balance between retail and wholesale operations. “We believe Cresco fits that bill,” Zuanic wrote.
“Based on our estimated EV of $2Bn (the BS is not out), taking the intraday to share price at 10 am of $3.99, the stock trades (ex-Columbia Care) at 2.3x CY22 sales (vs. the MSO average of 2.4x) and 8.4x EBITDA (9.9x),” Zuanic concluded. “We think the discount does not properly reflect the upside from the Columbia Care deal and the company’s competitive moat. We leave our last published price target for Cresco at $19 unchanged.”
However, there are investment risks. The sector still lacks favorable regulatory progress, in addition to the company issues with the integration of Columbia Care, “subpar growth trends, stiffer competitive dynamics in key states like IL and PA,” and “poor cost management.”
Light Dep Photo Courtesy of CPlant.
