Needham Initiates Coverage On Cresco Labs Amid 'Uncertain Prospects'

Cresco Labs Inc CRLBF has broken ground across 10 states and claims more than 20% market share in Illinois and Pennsylvania. One analyst team wants to see more action before buying into the growing cannabis play.

The Cresco Labs Rating: Needham analysts Matt McGinley and Evan Greenblatt initiated coverage on Cresco Labs with a Hold rating.

The Cresco Labs Thesis: By the analysts' assessment, Cresco’s Illinois and Pennsylvania operations could potentially generate a combined $350 million in annualized revenue.

“While revenue growth in '22 will likely require additional large capex investments, supply constraints and limited licensing all but ensure these will be very high return projects,” McGinley and Greenblatt wrote, noting that the two states, alone, could justify Cresco’s value.

They remain sidelined because of Cresco’s “uncertain prospects” in other markets, where investments and regulatory changes are needed to generate meaningful contributions, as well as its high valuation and weaker balance sheet relative to peers. As of now, its balance sheet is seen to be strained by free cash flow limits, current liabilities and leverage ratio.

“That said, a FCF inflection driven primarily by IL and PA in 2H should be the proverbial 'check in the mail' to begin to mitigate these balance sheet constraints,” the analysts wrote, forecasting a “step-function increase in revenue and EBITDA” in the back half of the year.

CRLBF Price Action: At the time of publication, Cresco traded around $4.15.

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