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Why Stifel Canada Thinks Cresco Labs Is a ‘Buy’

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Cresco Labs (OTMKTS:CRLBF) started fiscal 2020 on a good note with strong first-quarter results. The company had triple-digit revenue growth and another quarter of positive EBITDA. Some US cannabis companies’ performances have been good since the pandemic hit due to rising cannabis sales. Analysts are bullish about Cresco Labs. In particular, Stifel Canada thinks that Cresco Labs is a buy.

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Why Stifel Canada thinks Cresco Labs is a “buy”

Looking at Cresco’s strong first-quarter results, Stifel GMP analyst Robert Fagan reiterated his “buy” rating and target price of 13.0 Canadian dollars for the stock. According to Cantech Letter, the analyst stated that Cresco Labs has put itself in a good position in one of the emerging and strong markets right now—Illinois.

Illinois made recreational cannabis legal on January 1. Since then, the sales have been surging. Cresco Labs opened two new recreational stores in Illinois, which took its total count to seven. Fagan thinks that both of the stores could be very productive due to their location. One of the stores is close to Indianapolis, while the other store is in central Chicago. The sales potential from these stores could be around $15 million–$25 million a year after the pandemic retreats and supply constraints ease up. The analyst sees Cresco Labs as a cannabis leader in Illinois in the near future.

Fagan also expects a strong performance from Original House, which is already showing potential. He thinks that Cresco Labs’ presence in Michigan and Ohio will drive its revenue growth going into 2021. Just before the company’s first-quarter earnings, Cresco Labs announced its expansion in Ohio. The company will acquire four additional Ohio dispensaries with the help of Verdant Creations.

Looking ahead for Cresco Labs, the analyst said, “After high 26 percent organic growth in Q1, CL’s Q2 growth could slow somewhat with store closures in MA. However, with large capacity expansions coming on-line in H2 (IL & PA), improved retail positioning, and better margin trends in CA, we view CL’s growth outlook as steadily on track.”

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Analysts’ revised estimate for Cresco

Analysts revised the estimates for fiscal 2020 and beyond for Cresco Labs in June. They lowered the estimates despite the strong quarterly results. There’s still uncertainty surrounding the pandemic. As a result, there are supply constraints, delayed store reopenings, and cannabis legalization issues in many states. Let’s look at a month-over-month revision for Cresco Labs. For fiscal 2020, analysts lowered the revenue estimate from $374 million in May to $363 million in June. For fiscal 2021, analysts lowered the revenue estimate from $657 million to $648 million. They also reduced the estimate to $879 million from $914 million for fiscal 2022.

Analysts lowered the company’s EBITDA estimates. For fiscal 2020, analysts lowered the EBITDA estimate from $52 million to $48 million. However, the expectations for the profit numbers look good for fiscal 2021 and 2022. Cresco Labs has been expanding its footprint in the US. For fiscal 2021, analysts expect the EBITDA to be around $171 million from an estimate of $178 million in May. Also, analysts estimate an EBITDA of $222 million from $256 million in May.

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Analysts are very bullish on Cresco Labs stock

Analysts are very bullish on Cresco Labs stock. The company is one of the strongest players in the cannabis space compared to its Canadian peers. Green Thumb Industries (OTCMKTS:GTBIF) is also giving Cresco Labs a tough fight. Recently, Green Thumb Industries opened its 46th retail store. The company reported a YoY increase of 268% in its revenue growth in the first quarter. Meanwhile, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC)(TSE:WEED) reported revenue growth of 20.3% and 14.7% YoY in their recent quarters.

Currently, out of the 13 analysts that cover the stock, three recommend a “strong-buy,” while ten recommend a “buy.” The average target price is 11.98 Canadian dollars from 11.05 Canadian dollars before the company’s earnings. The stock has an upside potential of 90% as of its current closing price of 6.32 Canadian dollars on Wednesday.

As of Wednesday, Cresco Labs and Green Thumb stocks have fallen 1.7%, while Aurora Cannabis and Canopy Growth have gained 1.3% and 7.3%, respectively.

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