US-based vertically-integrated cannabis player Cresco Labs (CRLBF) (CL) is set to report its fiscal 2019 third-quarter results on November 26. The company operates 23 production facilities and 22 dispensaries and owns 56 retail licenses. It has a presence in 11 states.
Yesterday, Cresco Labs closed 0.66% lower than its previous close of 7.53 Canadian dollars on the CNSX (Canadian Securities Exchange). The stock also closed 0.33% below its previous close at $5.73 on the US OTC (over-the-counter) exchange. Cresco is down 18.59% and 15.06% YTD (year-to-date) on the CNSX and US OTC, respectively.
Analysts’ estimates for Cresco Labs’ earnings
Analysts expect Cresco Labs to report revenue of $39.87 million in the third quarter of fiscal 2019 and $53.92 million in the fourth quarter of fiscal 2019. They also expect the company’s fiscal 2019 revenue to come in at $147.20 million.
Analysts expect Cresco’s gross margins to be 49.00% and 46.45%, respectively, in the third and fourth quarters. They expect its adjusted EBITDA to be $2.90 million and $7.55 million, respectively, in the quarters. They expect its fiscal 2019 gross margin and adjusted EBITDA to be 47.60% and $12.18 million, respectively.
In the second quarter, Cresco Labs reported revenue of $29.89 million, a YoY (year-over-year) rise of 253% and a sequential rise of 42%. However, including revenue contributions from pending acquisitions, the company’s pro forma revenue rose 55% sequentially to $52.7 million. Its revenue exposure to the wholesale channel increased sequentially from 55% to 62% due to increased wholesale sales in California. Subsequently, its exposure to retail channels reduced from 45% to 38%.
In the second quarter, Cresco Labs reported a gross operating margin of 48.1%, a sequential rise of 3.5 percentage points. The company’s adjusted EBITDA was $14.5 million, which included a net benefit of $12.2 million due to biological assets.
According to its second-quarter earnings call, the company had the highest revenue exposure to Illinois and Pennsylvania in the second quarter. Cresco is focusing on becoming a dominant player in the creation of consumer brands and distribution to third-party dispensaries. The company has also opted for a solid inorganic growth strategy to expand its exposure to 70% of the addressable US population.
Growth trends in key markets
In Illinois, the company reported 30% organic growth sequentially. It added more than 5,200 patients every month in the state. It also benefited from Illinois’s permitting the use of medical marijuana in conditions such as migraines and chronic pain. The company expects to report significant growth in patients from Illinois for the remainder of fiscal 2019. Being the dominant player in Illinois, it also stands to benefit from the legalization of recreational cannabis in the state, which will come into effect on January 1, 2020. The company expects annual spending in the Illinois cannabis market to reach $2.0 billion–$4.0 billion at maturity.
In September 2019, Cresco Labs announced a sale and leaseback agreement for its Illinois properties Joliet and Kankakee to Innovative Industrial Properties (IIPR). This deal garnered it $46.3 million in non-dilutive capital. In September, the company also announced that it had secured approval for its three cultivation facilities—Joliet, Kankakee, and Lincoln—in Illinois. The total cultivation space is spread over 630,000 square feet. In October, the company also announced recreational-use approval for all five of its dispensaries in the state.
California is currently the biggest regulated cannabis market in the world. The state is also Cresco’s newest operating market. The company launched its products in California through the continuum distribution platform in June. It aims to leverage its experience in California for developing existing and new cannabis brands.
Cresco Labs’ inorganic growth strategy
In March 2019, Cresco labs announced plans to enter Florida’s cannabis market by acquiring VidaCann. While the deal hasn’t yet closed, VidaCann has continued with its expansion plans in Florida. At the end of the second quarter, VidaCann had 12 dispensaries in Florida. The company aims to increase this number to 20 by the end of 2019.
In April, Cresco Labs announced that it had entered into a definitive agreement to acquire Origin House for a total consideration of $1.1 billion. On November 13, the company announced an amendment to the merger terms to reflect the difficult conditions in the cannabis industry. As reported by Marijuana Business Daily, the amendment reduced the acquisition price to around $400 million. The deal could complete in January 2020, two months later than the original timeline.
In October, the company announced the completion of its acquisition of Gloucester Street Capital, the parent company of Valley Agriceuticals. Cresco now holds one of the ten vertically integrated cannabis licenses in the State of New York. According to Arcview and BDS Analytics estimates, the market opportunity in New York will be $500 million by 2022.
According to Cresco’s second-quarter earnings call, these two transactions have strengthened its position in two of the most influential cannabis markets in the US. Cresco Labs aims to deploy its mergers and acquisitions strategy to expand its geographic presence, penetrate deeper in these markets, and add new brands. The company also aims to expand its IP and asset base.
Analysts’ views and target price
Currently, ten analysts are covering Cresco stock on the CNSX, with a consensus recommendation of “buy.” Analysts have given the stock a target price of 17.83 Canadian dollars, implying a potential upside of 136.79% based on its last closing price. In October, ten analysts were covering Cresco stock, and they had a consensus target price of 18.03 Canadian dollars.
On September 13, The Fly reported that Cowen analyst Vivien Azer had initiated coverage on the stock with an “outperform” rating and target price of $14. On October 18, according to MarketWatch, Azer reduced the company’s target price to $13.