Columbia Care: Updated Estimates Ahead Of Acquisition By Cresco Labs

The Analyst

Columbia Care is being acquired by Cresco Labs CRBLF, in a deal set to close by year-end. In a research note published Thursday, Cantor Fitzgerald's Pablo Zuanic kept an overweight rating for CCHWF with a price target of $8.37.

“Due to the Cresco deal; our price target of $8.37 is based on our PT for Cresco, using the exchange ratio of 0.5579. (...) Our updated model feeds into our Cresco pro forma projections from 1/1/23. Our latest published price target for Cresco is $15. If we take the deal exchange ratio of 0.5579, this equates to $8.37,” Zuanic said.

On the heels of President Joe Biden’s Thursday announcement to pardon all federal marijuana possession convictions, Cresco's stock price soared. 

The Thesis

Zuanic noted that on 10/6, Cresco was trading at $3.30, and Columbia Care at $1.75. According to his CY23 estimates (8% below FactSet consensus on sales and 29% below on EBITDA), Columbia Care trades at 2x CY23 sales and 12.5x EBITDA vs. the MSO average of 2.2x and 8.9x, respectively.

Risks Analysis

According to Zuanic, 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.”

In terms of company risks, given the pending deal with Cresco, Zuanic highlighted that “the stock is tied to the share price of Cresco and the likelihood of the deal closing on the timeline set.”

Regarding operational risks, Zuanic said: “the company has above-average exposure to more-matured markets (yes it also has exposure to NJ and several east coast markets likely to legalize), so there is a risk to sales-growth estimates if new recreational markets do not develop as planned and/or if med markets do not switch to recreational in the timeline expected by investors.”

Improving Profitability

Although improving profitability is a key component of the bull case for the stock, Zuanic explained that the stock “could be affected by disruption as the company integrates the three recent acquisitions, or if economics in the more-restricted states become less favorable.

“Margin expansion is a major part of the rerating story, and the combination of execution risk (as it expands cultivation) and integrating new assets (G-Leaf, others) could impact the company’s ability to deliver on margin upside (this is partly why our margin assumptions for 2022 are 4pt below FactSet consensus),” Zuanic concluded.

Image By Ilona Szentivanyi.