Why Is There Optimism before Cresco Labs’ Q4 Earnings?

As of Tuesday, Cresco Labs (OTCMKTS:CRLBF)(NYSE:CL) was trading at 5.73 Canadian dollars—a fall of 25.2% since the company reported its third-quarter earnings on November 26. The lower-than-expected third-quarter performance and weakness in the cannabis sector dragged the stock down. However, optimism about the company’s acquisition of Origin House and Hope Heal Health limited some of the downsides. Meanwhile, the company will likely report its fourth-quarter earnings after the market closes on April 27. The fourth quarter ended on December 31, 2019.

Analysts expect Cresco Labs to report revenue of $43.7 million in the fourth quarter—YoY growth of 157.9% from $17.0 million in the fourth quarter of 2018 and sequential growth of 20.8% from $36.2 million in the third quarter of 2019. In October 2019, the company completed the acquisition of Gloucester Street Capital, which owns Valley Agriceuticals. With the acquisition, the company acquired one of the ten vertically integrated cannabis licenses in the state of New York. In December, the company announced that it completed the first harvest from its expanded cultivation facility in Lincoln, Illinois. All of these initiatives will likely drive the company’s revenue in the fourth quarter.

Analysts expect Cresco Labs to report a positive EBITDA in the fourth quarter. They expect the company to report an adjusted EBITDA of $2.71, which represents a significant improvement from a negative EBITDA of $4.64 million in the third quarter of 2019. The revenue growth and lower SG&A expenses will likely drive the company’s EBITDA during the quarter. However, the lower gross margin could offset some of the improvement in the EBITDA.

After Cresco Labs reported its third-quarter earnings, PI Financial and Canaccord Genuity lowered their target prices. Overall, analysts’ consensus was 14.04 Canadian dollars as of Tuesday, which represents a 12-month return potential of 145.1% from its closing price of 5.73 Canadian dollars on the same day. In January, Russell Stanley of Beacon Securities stated that he was optimistic about Cresco Labs. To learn more, read Why Beacon Securities Thinks Cresco Labs Is Cheap. Meanwhile, all of the 12 analysts that follow the stock recommend a “buy.” None of the analysts recommend a “hold” or a “sell.”

So far, the cannabis sector has been under pressure in 2020. The pricing pressure, strong black market, and rising operation losses have dragged the sector down. The ETFMG Alternative Harvest ETF (NYSE:MJ) has fallen by 34.1% this year. Weakness in the sector appears to have dragged Cresco Labs stock down. The company has lost 35.8% of its stock value YTD. Meanwhile, Charlotte’s Web Holdings (OTCMKTS:CWBHF), Curaleaf Holdings (OTCMKTS:CURLF), and MedMen Enterprises have fallen by 41.2%, 30.7%, and 62.9%, respectively.

Despite the stock decline, I’m bullish on Cresco Labs. This year, the company completed the acquisition of Origin House and Hope Heal Health. The company is still working to complete the acquisition of Tryke Companies. Overall, the acquisitions have expanded Cresco Labs’ operations in California, New York, and Massachusetts, which are prominent marijuana markets. The first year after recreational cannabis legalization, Massachusetts sold $450 million worth of recreational cannabis. Meanwhile, California is one of the largest cannabis markets in the world. So, I think that Cresco Labs, with its acquisitions, is well-positioned to capture the growing cannabis industry. I think that investors with a longer horizon should accumulate the stock on dips.