Cantor Reaffirms Overweight Rating On Cresco Stock Post Earnings Based On The Company's Franchise Strength

Vertically integrated cannabis company Cresco Labs Inc. CL CRLBF posted its first-quarter earnings on Wednesday with revenue of $178.4 million, up by 168.8% year-over-year.

It also reported record wholesale and retail revenue of $95.6 million and $82.8 million, respectively. In the quarter, the company achieved a positive adjusted EBITDA of $35 million, up by 507.2% from the same period of the prior year.     

The Analyst

Cantor Fitzgerald’s Pablo Zuanic reaffirmed both an “Overweight” rating on the stock and price target of $21.50.

The Investment Thesis

With quarterly sales of $178.4 million, Cresco managed to beat both FactSet consensus and Cantor Fitzgerald’s sales estimates of $170.4 million and $173.5 million, respectively, Zuanic explained in a Thursday analyst note.

While wholesale figures are slowly growing, the company’s retail sales were up 15% sequentially, with same-store sales up by 9% from the previous quarter, Zuanic added.

“Ex merger and acquisitions, we expect wholesale to grow in single digits sequentially in 2Q and 3Q and to ramp up in 4Q as new cultivation comes on stream.”

Cresco should add more retail locations in Pennsylvania and Massachusetts and start incorporating Bluma’s earnings in the second quarter and Cultivate’s by the last quarter of 2021, Zuanic said, adding that Cantor is not changing their quarterly projections.

While Cresco has not yet disclosed its full-year 2021 guidance, it has projected closing the year at a $1 billion sales run rate. This means that their fourth-quarter sales should reach $250 million, compared to the pre-print consensus and Cantor’s estimates of $241 million and $237 million, respectively.

The company also projects to exit the year with 30% EBITDA margins and gross margins of 50%, which Cantor views as risky but will wait for SEDAR filing to update their projections.

“We calculate Cresco trades at 10.8x CY22E EBITDA versus the group average of 13.7x and at 2.9x sales versus the group average of 4x; in part, this reflects the lower margins versus other multi-state operators. Other than outlier Gage Growth GAEGF (4.6x), the 'discounted' multi-state operators trading in the 9-11x range also include AYR Wellness AYRWF and Trulieve TCNNF,” according to the analyst's note.

While all three companies have value potential, Zuanic rates only Cresco and Trulieve Overweight based on their franchise power and position in crucial states.

The Price Action

Cresco’s shares were trading 2.01% higher at $12.17 per share at the time of writing.

Photo by Ryan Lange on Unsplash