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Has Cresco Labs Bottomed Out in 2020?

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As of Tuesday, Cresco Labs (OTCMKTS:CRLBF) was trading at 6.73 Canadian dollars, which represents a fall of 24.6% since the beginning of the year. Earlier this month, the company announced that it closed the senior secured term loan for $100 million. The agreement has an option to increase the loan facility to a maximum of $200 million. Notably, the company’s stock price fell due to an increase in Cresco Labs’ debt and weakness in the cannabis sector. Meanwhile, the company is trading at a discount of 63.4% from its 52-week high of 18.37 Canadian dollars and at a premium of 14% from its 52-week low of 5.90 Canadian dollars. So, has the stock bottomed out? To answer the question, let’s look at analysts’ expectations.

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Analysts’ expectations for Cresco Labs

Analysts expect Cresco Labs to report revenue of $131.9 million in fiscal 2019 and $518.2 million in fiscal 2020. These estimates represent a YoY rise of 204.9% in 2019 and 293% in 2020. The company acquired Valley Agriceuticals in October 2019, Origin House in January 2020, and Hope Heal Health last week.

Illinois legalized the sale of recreational cannabis from January 1, 2020. Cresco Labs owns five Sunnyside dispensaries in the state, which serve recreational customers. The company plans to open five more dispensaries soon.

Through the acquisition of Valley Agriceuticals, Cresco Labs owns one vertically integrated cannabis business license in New York. The license allows the company to operate one production facility and four dispensaries in the state. Origin House operates six licensed facilities in California. Also, Origin House distributes more than 50 brands of cannabis products to 400 retailers in the state. So, the acquisition of Origin House gives Cresco Labs access to the largest cannabis market in the world. Hope Heal Health operates a cultivation and manufacturing facility in Massachusetts. All of these factors could drive Cresco Labs’ revenue.

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Analysts’ EBITDA expectations

In the fourth quarter of 2019, analysts expect Cresco Labs to report an EBITDA of $1.8 million, which would take the company’s total EBITDA for 2019 to $4.78 million. The EBITDA represents a fall of 32.8% from $7.11 million in 2018. For 2019, analysts project higher operating expenses to lower the company’s EBITDA. However, the higher gross margin could offset some of the declines.

For 2020, analysts expect Cresco Labs to report an EBITDA of $122.7 million, which represents a significant improvement from $4.78 million in 2019. Overall, analysts expect higher revenue, an improved gross margin, and lower operating expenses as a percentage of the total revenue to drive the company’s EBITDA.

Analysts’ recommendations

Analysts are bullish on Cresco Labs. Among the 11 analysts that follow the stock, three recommend a “strong-buy,” while nine recommend a “buy.” None of the analysts recommend a “hold” or “sell” rating. As of Tuesday, analysts’ consensus was 15.30 Canadian dollars. The consensus represents a 12-month return potential of 127.4% from the stock price. Beacon Securities is optimistic about Cresco Labs. To learn more, read Why Beacon Securities Thinks Cresco Labs Is Cheap.

Let’s look at analysts’ recommendations for Cresco Labs’ peers.

  • Among the ten analysts that follow Charlotte’s Web Holdings (NYSEARCA:CWEB), eight recommend a “buy,” while two recommend a “hold.” Analysts’ consensus target price is $15.96 with a return potential of 146.7%.
  • Overall, nine analysts cover Curaleaf Holdings. Among the nine analysts, eight recommend a “buy,” while one recommends a “hold.” Analysts’ consensus target price is 15.66 Canadian dollars, which implies a return potential of 91.9%.
  • Analysts favor a “hold” rating for MedMen Enterprises (OTCMKTS:MMNFF). Among the eight analysts, seven recommend a “hold,” while one recommends a “buy.” Analysts have given a 12-month target price of 1.78 Canadian dollars with 12-month return potential of 291.2%.

Cresco Labs provides a considerable opportunity for growth. However, we expect the stock to be under pressure in the near term due to weakness in the cannabis sector.

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