Stock Analysis & Ideas

Cresco Labs’ Stock Looks Like a Potential Bargain

I remain resolutely bullish on cannabis retailer Cresco Labs (CRLBF). I gave a bullish rating to CRLBF shares last August, and I continue buying. Congress will reform federal banking and interstate commerce laws.

Buying CRLBF today is a low-risk bargain, in my opinion. Patience will likely be rewarded.

Impediments Suppressing Shares

Politics impede the growth of the cannabis industry.

Initially, investor enthusiasm created a cannabis boom and lots of winners. CRLBF popped last summer on a hunch the Cannabis Administration and Opportunity Act would pass in Congress. The Schumer-Booker Senate bill fell off the agenda and cannabis stocks flagged.

Marijuana is now legal in 18 states. $8 billion in tax revenue to states was generated by May 2021, according to the Marijuana Policy Project.

States collected nearly $3 billion in taxes from cannabis sales in 2020. California collected 62% more tax revenue, $1 billion, from marijuana growers and sellers in Fiscal 2020 than in 2019. The revenue collected in Illinois is breaking records and now outpace tax revenue collected from alcohol sales.

How They Hurt

Federal intransigence and Draconian rules and regulations increase operating costs, cut deep into profits, and limit advertising and marketing. They prohibit cannabis companies from taking normal business tax deductions. If allowed to employ normal business accounting measures and cut operating costs, Cresco Labs might generate 20% to 30% more income, in my opinion.

Security costs more than normal because it is a cash business. Federally insured banks will not take cash. Cresco Labs pays more to borrow from individuals and other lending sources. Cannabis stocks are not being sold by major brokerage houses.

Another impediment to growth and profitability is federal interstate commerce laws. Marijuana is not transported across state lines. They cannot grow it in one state, package it, and ship cannabis products to a neighboring state even when cannabis is legal in both states. It violates federal law. It stifles economies of scale.

Groundswell Is Growing

In a move reflecting the groundswell of support for the industry, top marijuana stocks of companies in research, development, distribution, and “companies that indirectly support these operations” are moving to the NASDAQ in 2022.

Cresco Labs, a cultivator, producer, toll manufacturer, distributor, and retailer-wholesaler, owns and markets its own name brands. It manufactures and sells flower products, brand-name edibles and oils, ancillary wellness products, smoking, and vaping products. Its SEED initiative educates minorities and women to work and own marijuana businesses.

Cresco Labs owns and operates 21 production facilities, holds 51 retail licenses, and has 45 dispensaries in 10 states. Its brands and private label products sell in other retail shops.

Wall Street’s Take

Turning to Wall Street, the consensus rating is a Strong Buy, based on six Buys and one Hold assigned in the past three months.

The average Cresco Labs price target is $19.15, implying 195.5% upside potential. I surmise the stock can hit the upper target of $28.06, an implied 333% upside.

TipRanks’ Smart Score

CRLBF scores a 4 out of 10 Neutral Smart Score rating. 95% of bloggers are bullish. So are all the news media reports.

TipRanks’ investors turned very negative as the share price dove and technicals turned negative in March. On top of this, the return on equity is -55.07%.

Management is building a thriving business despite the impediments. 

Cresco Labs reports $6 million in sequential top-line growth in Q3 ’21. Revenue increased 2.6% quarter over quarter and +40% year over year. A setback occurred when the company took a write-down in Q3.

In Q3 2021, Cresco Labs lost $263.5 million (operating loss). It took a $291 million write-down after making a strategic shift in its California operations, removing third-party brands from shelves in its dispensaries.

The company expects Q4 2021 revenue between $235 million and $245 million versus a consensus forecast of $238.7 million. I expect margins to climb to 55% in Q4 after increasing in Q3. A debt load of $603 million exceeds its cash of $252.8 million and receivables of $50 million.

Last Word

I recommend collecting shares at this price. I think the stock is undervalued. Be patient, but there are risks. A divided federal government might delay action for several years. That makes this a good time to accumulate CRLBF at low share prices. Legal changes are inevitable.

Another risk is Cresco Labs’ growth curve. Cresco Labs is growing market share, revenue, and its footprint through acquisitions. Might it exceed its ability to manage daily operations more efficiently? The company has a slew of open positions.

For management, this might be the time, with labor shortages and supply chain issues, to focus on internal infrastructure. For investors, I feel this is a good time to buy CRLBF.

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Disclosure: At the time of publication, Harold Goldmeier has a position in Cresco Labs Inc securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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