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Is There More Upside to Cresco Labs’ Stock Price?

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Amid the weakness in the global financial markets due to the COVID-19 outbreak, Cresco Labs (OTCMKTS:CRLBF) fell to a low of 2.81 Canadian dollars on March 17. Since then, the stock has risen 51.2% to 4.25 Canadian dollars as of Monday. Cannabis sales in the US and Canada have increased due to social distancing. Also, a pullback in the broader equity markets due to the announcement of a $2.0 trillion stimulus package led to a rise in the company’s stock price. However, Cresco Labs is still trading 76.9% below its 52-week high of 18.37 Canadian dollars. So, is there more upside to the stock price?

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Analysts’ revenue expectation for Cresco Labs

Analysts expect Cresco Labs to report revenue of $45.3 million in the fourth quarter. The amount would raise the company’s total revenue for fiscal 2019 to $131.9 million—a rise of 204.9% from $43.3 million in 2018. For fiscal 2020, they expect the company to record revenues of $515.6 million—291% growth YoY. I expect the acquisitions of Valley Agriceuticals in October 2019Origin House in January 2020, and Hope Heal Health in February to drive the company’s revenue. Meanwhile, the company is working to close the acquisition of Tryke Companies. Cresco Labs owns six dispensaries in Nevada and Arizona. The company also has cultivation and process capacity in Las Vegas and Phoenix. 

On January 1, 2020, Illinois legalized the sale of recreational marijuana. As of January 1, the company operated five Sunnyside dispensaries in the state. Illinois plans to open another five dispensaries in the state. Also, the company converted four of its dispensaries in New York to Sunnyside dispensaries last month. Cresco Labs launched a home delivery service for medical cannabis in the New Hartford area of New York.

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Hope Heal Health operated a cultivation and manufacturing facility in Massachusetts. The company had licenses for cultivation, product manufacturing, and retail operations in the state. Hope Heal Health can obtain two more retail licenses in the state. So, the acquisition would help Cresco Labs expand its business in Massachusetts. Similarly, the acquisitions of Valley Agriceuticals and Origin House would help the company’s expansion in New York and California, respectively.

Analysts’ EBITDA expectations

Analysts expect Cresco Labs to report an EBITDA of $9.3 million and $102.5 million in fiscal 2019 and fiscal 2020. The EBITDA represents growth of 30.4% YoY in fiscal 2019 and 1,004.5% in fiscal 2020. The revenue growth and expanded gross margin could drive the company’s EBITDA in fiscal 2019 and fiscal 2020.

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Valuation multiple

Since the beginning of this year, Cresco Labs has lost 52.4% of its stock price. The decline has lowered the company’s valuation multiple. As of March 30, the company was trading at a forward EV-to-sales multiple of 2.09x compared to 4.1x at the beginning of this year. As of Monday, Cresco Labs was trading at a discount compared to its peers. Curaleaf Holdings and Charlotte’s Web Holdings (OTCMKTS:CWBHF) were trading at a forward EV-to-sales multiple of 2.85x and 3.31x, respectively. Meanwhile, MedMen Enterprises (OTCMKTS:MMNFF) was trading at a valuation multiple of 1.95x on the same day.

Analysts’ recommendations for Cresco Labs

Analysts are bullish on Cresco Labs. All 12 of the analysts that follow Cresco Labs recommend a “buy.” None of the analysts recommend a “hold” or “sell” rating. As of March 30, analysts’ consensus target price is 14.63 Canadian dollars. The target price represents a 12-month return potential of 244.2%.

My take

I’m bullish on Cresco Labs stock. The company’s acquisitions have expanded its operations in California, New York, and Massachusetts—prominent marijuana markets. The first year after the legalization of recreational cannabis, Massachusetts sold $450 million worth of recreational cannabis. Meanwhile, California is one of the largest cannabis markets in the world.

So far, only 11 US states have legalized recreational marijuana, while 33 states have legalized marijuana for medical purposes. Many states are working to legalize cannabis for medical and recreational purposes. So, I think that Cresco Labs is well-positioned to capture the growing cannabis industry. Investors with long-term prospects should utilize the dips in the company’s stock price to accumulate more stocks. 

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