Cantor Is Bullish On Cresco Labs, But Lowers Price Target

Cantor Fitzgerald released a report Monday after a conversation with Cresco Labs’ CRLBF management team.

The firm is bullish on the MSO, but nonetheless adjusted its 12-month price target from $12 to $10 due to sector valuation compression.

Cantor is reaffirming its "offer wanted" stance on Cresco. The company did not issue guidance, but consensus drawn from financial data company FactSet puts 2020 sales north of $500 million and EBITDA around $100 million.

M&A’s Influence on Cresco’s Balance

In early January, Cresco completed the acquisition of Origin House, a California distributor and brand developer. The integration of this company to its ecosystem allows Cresco to save on distribution costs in the Golden State. Origin House generates about $17 million in quarterly sales but it’s currently facing an EBITDA of negative 50%.

An ongoing deal to acquire Tryke is currently afoot. Cantor estimates that at best, Cresco will enjoy Tryke’s EBITDA of 36% on $17 million quarterly sales for six months of FY2020, since the deal is expected to be completed by June.

New Markets Drive Revenue

According to the firm, 80% of the company’s sales for 2020 will come from Illinois, California and Pennsylvania. 

This number is driven partly by Illinois shift to recreational starting January. In Illinois the first two months of adult-use and medical sales surpassed purely medical sales of the last two month of the previous year by a factor of 2.5 times.

The Origin House acquisition strengthens Cresco’s position in California.

By the end of March, the company is expecting to nearly double its production capacity in Pennsylvania, from 55,000 square-feet to 105,000 square-feet. While Pennsylvania’s market is still medical, this bet places Cresco in a strong position if adult-use is legalized in the state.

Cresco has stated that its pro-forma cash amounts to $115 million, which Cantor says puts it at a strong position against its peers.

COVID-19 Could Have Big Influence on Cannabis

Demand for cannabis products has seen a rise from consumers stocking up before prolonged periods of social distancing, amid the COVID-19 outbreak.

Sales data from this period is still too recent to draw any long-term conclusions. However, industry actors are expecting states to become more flexible on recreational cannabis legislation as a way to improve their budget shortfalls generated by the pandemia.

Illustration by Ilona Szentivanyi