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Can Cresco Lab’s Q3 Earnings Drive the Cannabis Sector?

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Last week, the House Judiciary Committee passed legislation that legalizes cannabis at the federal level. The legislation boosted the cannabis sector. The ETFMG Alternative Harvest ETF (MJ) rose 4.5% last week. Can the sector maintain its upward momentum? Cresco Labs (CRLBF) (CL) will report its third-quarter earnings tomorrow after the market close. If Cresco Labs posts a strong performance, it could drive the company and the sector higher.

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As of November 22, Cresco Labs was trading at 7.65 Canadian dollars, which implies a fall of 30% since its second-quarter earnings on August 21. Higher-than-expected net losses in the second quarter, the amended acquisition agreement with Origin House, and weakness in the cannabis sector caused the stock to fall. In the second quarter, Cresco Labs reported revenues of $29.9 million, which beat analysts’ estimate of $27.9 million. However, the company’s net losses were $0.08 per share higher than analysts’ expectation of $0.01 per share. Let’s look at analysts’ third-quarter expectations.

Cresco Labs’ revenues to rise

For the third quarter, analysts expect Cresco Labs to report revenues of $38.45 million. The estimate implies a sequential growth of 28.6% from $29.9 million in the second quarter. In August, Illinois expanded the list of qualifying medical conditions to include chronic pain and migraines, which could increase Cresco’s patients. In June, the company introduced its products to Continuum distribution, which covers most of the dispensaries in California. Along with these initiatives, the introduction of Cresco branded THC products in seven of 11 markets could drive Cresco Labs’ revenues in the third quarter.

For the comparable quarter, Curaleaf Holdings (CURA) (CURLF) reported sequential revenue growth of 27.0%. Analysts expect MedMen Enterprises’s (MMEN) (MMNFF) revenues to rise 13.8% during the same period.

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Cresco Labs’ net loss to increase

Analysts expect Cresco Labs to report a net loss of $4.36 million in the third quarter—an increase of 115.4% from a loss of $2.03 million in the second quarter. Higher operating expenses and D&A (depreciation and amortization) expenses will likely overcome the positive effects of the higher gross margin and increase the company’s net losses.

Cresco Labs has outperformed analysts’ revenue estimates two times in the last four quarters. However, the company’s net losses were higher than analysts’ expectations in all four quarters.

Analysts’ recommendations

Since Cresco Labs reported its second-quarter earnings, Cowen and Company, PI Financial, and Canaccord Genuity have all cut their target prices. Cowen and Company lowered its target price from $14 to $13. PI Financial reduced its target price from 23 Canadian dollars to 15 Canadian dollars, while Canaccord Genuity lowered its target price from 22 Canadian dollars to 19 Canadian dollars. Overall, analysts’ consensus target price stands at 17.83 Canadian dollars, which implies a return potential of 133%. Analysts look bullish on the stock. All ten of the analysts that cover the stock have rated it as a “buy.”

YTD stock performance

So far in 2019, Cresco Labs has lost 17.3% of its stock value as of November 22. However, the company has outperformed MedMen Enterprises and OrganiGram Holdings (OGI), which have fallen 81.0% and 27.7%, respectively. During the same period, Curaleaf has returned 26.9%. The company reported lower-than-expected net losses in the third quarter, which drove its stock price. To learn more, read Curaleaf Impressed with Strong Q3 2019 Earnings. Visit 420 Investor Daily for more cannabis-related news.

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