Why Beacon Securities Thinks Cresco Labs Is Cheap

On Thursday, Cantech Letter reported that Russell Stanley of Beacon Securities is optimistic about Cresco Labs (CRLBF) in the cannabis space. The cannabis sector has been going through a rough period. Stanley expects Cresco Labs’ acquisition of Origin House, Hope Heal Health and Tryke, its fourth-quarter results for fiscal 2019, and the announcement of its expansion plans in Illinois and Pennsylvania to drive the company. He maintained the “buy” rating and a 12-month price target of 24 Canadian dollars. Stanley’s target price represents a return potential of 182.4% from the company’s closing price on Thursday.

Cresco Labs expands its retail footprint in Illinois

Illinois allowed recreational cannabis starting on Wednesday. In order to capture the opportunity, Cresco Labs opened five Sunnyside dispensaries in the state on Monday. The Sunnyside.shop website, which launched the same day, supports these dispensaries. The website has detailed information about the products and recommendations from experts. Customers can order products online for home delivery or pick them up at one of the stores.

With Illinois being the second most populous state to have legalized recreational cannabis, Stanley sees the company’s expansion in the state favorably. According to Cantech Letter, Stanley stated that Beacon Securities revised its estimates for the fourth quarter of fiscal 2019 and fiscal 2020 to reflect the company’s focus on its three key states—Illinois, Pennsylvania, and California.

For fiscal 2020, Stanley expects Cresco Labs to report an EBITDA of $131 million on revenues of $562 million. He expects the numbers to improve more in fiscal 2021 with an EBITDA of $487 million on revenues of $1.19 billion. He added that Cresco Labs traded at 5.4x times his 2021 EBITDA estimates. However, other US cannabis companies’ average valuation multiple was  6.8x. The broader peer group’s average valuation multiple was 13.4x. So, Stanley thinks that Cresco Labs’s valuation multiples look cheap.

Other analysts’ estimates and recommendations

Overall, analysts expect Cresco Labs to report an EBITDA of $141.3 million on revenues of $545 million in fiscal 2020. For fiscal 2021, analysts expect the company to report an EBITDA of $299.8 million on revenues of $866.1 million.

Analysts are bullish on the stock. Among the 11 analysts, three recommend a “strong-buy,” while eight recommend a “buy.” None of the analysts recommend a “hold” or “sell.” Analysts’ consensus target price is 16.11 Canadian dollars with a 12-month return potential of 89.5%.

Stock performance

Since the beginning of 2019, Cresco Labs has lost 8.1% of its stock value as of Thursday. In the last quarter, the stock missed analysts’ expectations. Also, weakness in the cannabis sector contributed to a fall in the company’s stock price. Despite the fall, Cresco Labs outperformed cannabis ETFs. The ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have fallen 32.2% and 40.3%, respectively, during the same period. OrganiGram Holdings (OGI), Curaleaf Holdings (CURA), and MedMen Enterprises (MMNFF) have returned -37.0%, 23.5%, and -82.1%, respectively.

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