Among the top 5 multi-state operators (MSOs) in the cannabis industry is Cresco Labs CRLBF, with a significant presence in states like Ohio, Pennsylvania and Florida.
According to a report from Pablo Zuanic of Zuanic & Associates, among the top 5 MSOs, Cresco has the strongest brand portfolio measured by market share in overlapping states and operates one of the best-performing dispensary chains
Cresco Labs' profit and cash flow metrics are among the best in MSOs and trading at 6.5x EBITDA, the stock is attractively valued compared to peers. This makes Cresco Labs an interesting cannabis stock for investors seeking value and growth in the industry.
Financial Performance
According to Zuanic’s report, Cresco Labs has shown substantial improvement in its financial metrics. As of the first quarter of 2024, the company reported sales of $194 million, with an estimated revenue of $748 million for the full year. Cresco's second-quarter earnings forecast projects an increase in sales to $199 million by the end of 2025.
The company’s adjusted gross margins have increased by nearly 600 basis points to 51% in the first quarter of 2024.
The adjusted EBITDA margins have also risen significantly, improving by 1400 basis points to 29%.
Operating cash flow has seen a marked increase, rising from $15-19 million in the calendar years 2021-2022 to $59 million in 2023.
Market Position And Valuation
In 2023, Cresco Labs focused on improving its financial performance by divesting underperforming units and concentrating on its core operations. This strategic shift has led to significant improvements in profitability and cash flow.
The report notes now Cresco Labs operates in eight states with 70 operational stores and 13 production sites
Looking forward, Cresco plans to expand its retail and distribution coverage in new adult-use markets, with a particular focus on Florida, Ohio and Pennsylvania.
Zuanic regarded Cresco as "a valuable franchise in the current industry regulatory context.”
“Five states account for over 95% of Cresco's sales: Illinois, Pennsylvania, Florida, Massachusetts, and Ohio. Has a narrower footprint but a higher average market share and brand strength,” Zuanic wrote. “The company derives a larger share of sales from third-party stores, and its retail performance under the Sunnyside banner yields revenue per store above the respective averages.”
Rec Market Optionality
Ohio, Pennsylvania and Florida account for nearly 50% of Cresco Labs' sales, presenting a significant growth opportunity if these states legalize recreational cannabis.
“We calculate Florida, Ohio, and Pennsylvania account for close to 50% of Cresco's sales, which gives Cresco more 'rec upside' compared to Green Thumb GTBIF at 24%, Verano VRNOF at 33%, and Curaleaf CURLF at 38%,” Zuanic wrote.
In Ohio, Cresco is among only four MSOs that could end the year with eight stores (Acreage ACRHF, Cannabist CCHWF, and Green Thumb being the others). Zuanic adds, “We believe the market could be 3-4 times larger by the end of 2025.”
For instance, if Florida, Ohio and Pennsylvania transition to recreational markets, Cresco could see an additional $260 million in EBITDA, which would be a substantial increase from the $174 million reported in calendar year 2023.
"If we assume average market share for Cresco of 7-10% in these three states and average 35% EBITDA margins, that would amount to an additional $260 million in EBITDA for the company," Zuanic said. "This additional EBITDA would represent a significant boost to Cresco's financial performance, positioning the company well above its current market cap."
Investment Summary
Zuanic & Associates has initiated coverage of Cresco Labs with an Overweight rating. The company's robust market presence, strong brand portfolio and attractive valuation make it a compelling investment. Cresco Labs is a top performer among MSOs with significant growth potential in key markets.
While Cresco has expanded in Florida with Bluma Wellness and deepened its presence in Pennsylvania with Laurel Harvest and Cure Penn, it missed recreational markets like Maryland and New Jersey.
This renewed focus and discipline led Cresco to avoid the New York recreational market, not paying the fee to co-locate recreational services at medical stores or expand cultivation. "The company has called the last 12 months 'the year of the core,' as it regains focus and seeks to improve profitability," Zuanic noted and added that Cresco now aims for smaller accretive deals, recognizing potential growth in Maryland and New Jersey.
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