After Cresco Labs CRLBF CL conference call, Pablo Zuanic, from Cantor Fitzgerald, maintained an Overweight rating and maintained a 12 month price target of $19.
We will not update forward quarterly estimates until SEDAR is out of the way tomorrow, according to the analyst note dated May 18, 2022 by Zuanic.
The analyst said that the company's markets fell 2% sequentially in 1Q 22 sales of $214 million, down 2% sequentially retail 2%, wholesale 6%, and in organic terms adjusting for the full of assets acquired in Pennsylvania during the fourth quarter.
Zuanic explained Cresco's adjusted gross margins fell 180 bp sequentially to 52.6% and EBITDA margins dropped 250 bp to 23.7%. There was an increase in price competition in key markets MA and continued macro pressures that explain the 1Q performance, according to Zuanic.
The analyst said the company is guided for muted growth for 2 Q but is confident that expanded assortment new formats in FL, IL and other states, as well as increased efficiencies, will lead to growth in the second half of 2022.
Cresco expects to close the Columbia Care deal, plus entry into 8 new states, including NJ VA, and to close eight states by CY 23, generating over $100 Mn in revenue each. The deal disposals it plans to raise $300-400 million will be necessary because it will need to divest assets in IL, PA, OH, FL and MD, according to Zuanic.
With the sector at historic lows, Zuanic said he prefers investing in the larger MSOs that have developed a competitive moat breadth, depth have a solid financial position, and a healthy balance between retail and wholesale operations. We believe Cresco fits into that bill, Zuanic wrote.
The stock trades ex-Columbia Care at 2.3 x CY 22 sales compared to the MSO average of 2.4 x and 8.4 x EBITDA 9.9 x Zuanic concluded with the BS not out taking the intraday to share price at 10 am of $3.99. We think the discount does not reflect the upside from the Columbia Care deal and the competitive moat. We leave our last price target for Cresco at $19 unchanged. There are investment risks. The sector still lacks favorable regulatory progress, as well as the company issues with the integration of Columbia Care, subpar growth trends, stiffer competitive dynamics in key states like IL and PA and poor cost management.