Columbia Care: Challenging 1Q, Stock Is Now Tied to Cresco Deal Analyst Says

The Analyst

Pablo Zuanic, from Cantor Fitzgerald, rated Columbia Care Inc. CCHWF as Overweight with a price target of $5.10.

The Thesis

Columbia Care reported its unaudited financial and operating results for the first quarter ended March 31, 2022, on Monday. The firm reported revenue of $123 million, an increase of 43% YoY, and a gross profit of $57 million -an increase of 68% YoY. However, Zuanic will keep the rating, estimates and price target unchanged on shares of CCHWF until the company has filed SEDAR statements for the quarter.

Columbia’s reported sales of $123 million were below the FactSet consensus of $138 million. “We have adjusted our 2022 estimate for the reported quarter. The sequential drop from $139Mn was partly attributed to the strong outdoor crop in CO in 4Q, which boosted sales back then but also contributed to above-normal supplies in 1Q,” Zuanic said in a recent analyst note. “Also, seasonality and macroeconomic issues impacted the quarter. Adjusted gross margin improved 150bp seq to 46%, and EBITDA margin dropped 1pt to <14%.”

Zuanic noted that the all-stock sale to Cresco CRLBF is expected to close in 2022. ”Columbia Care shareholders will receive 0.5579 of a subordinate voting share of Cresco and will end up owning 35% of the Cresco pro forma share count (on a fully diluted, in-the-money basis).”

“Taking Friday’s close for Cresco shares (US$3.89), the offer is worth US$2.17 (Columbia Care closed at US$1.90 on Friday). The company kept guidance for the year ($625-675Mn and EBIDTA of $120-135Mn), which seems a stretch based on the 1Q performance, in our view. That said, management seems confident based on the NJ rec ramp and capacity expansion plans there; WV and VA patient registration ramp, and OH new stores, although it admits market price pressures and consumer wallet issues continue to hurt the macro environment. We are leaving our estimates unchanged until SEDAR has been filed,” Zuanic said.

Investment Risks

According to Zuanic, the main risk relates to the closing of the sale to Cresco. “In terms of industry risks, as with other US MSOs, macro risks are mostly of a regulatory nature, with the pace of deregulation both at the state and a federal level playing a key part in the investment upside for MSO stocks,” he said.

In addition, the analyst noted the company has “above-average exposure to more-mature markets.”

“There is a risk to sales-growth estimates if new recreational markets do not develop as planned and/or if medical markets do not switch to recreational in the timeline expected by investors,” Zuanic concluded. “Improving profitability is a key component of the bull case for the stock, but this could be affected by disruption as the company integrates the three recent acquisitions, or if economics in the more-restricted states become less favorable (for now, supplies in such states lag demand).”

Price Target

Columbia Care was trading 2.63% higher, at $1.95 per share at the time of writing.

Image By Ilona Szentivanyi.