Will Cresco Labs Stock Recover?

Going into 2024, the cannabis market was growing well and changing fast. Whitney Economics, well-known for advising, providing information and conducting economic studies on cannabis and hemp businesses worldwide, published its prediction of United States legal cannabis sales for 2024.

It expects that in 2024, the total amount from selling adult-use and medical products legally will reach more than $31.4 billion, a rise of $2.6 billion versus 2023, and representing a yearly growth rate of 9.1%.

In November last year, Cresco Labs Inc. (OTC:CRLBF) released positive news after more than 56% of people in Ohio chose to approve a law to legalize cannabis.

Now, Ohio is the 24th state where adults aged 21 and over are no longer prohibited from using cannabis. Cresco’s CEO Charles Bachtell mentioned the whole market for cannabis in the United States might be more than $100 billion annually, and state-regulated programs contribute less than 30% of this amount.

In spite of the these positives, Cresco Labs has struggled to gain traction after a material selloff in recent years, so what does the future hold now?

Cresco Continues To Expand in Top Markets

Cresco Labs was founded in 2013 and operates in eight states. It has operations across the cannabis industry and leads the market with branded products. 

In February, the company reported that a new retail store would open in Pennsylvania. The opening of this location will increase the number of Cresco Labs’ stores to a total of 15 in Pennsylvania and amount to 72 in total across the whole country.

Gettysburg is home to a population of around one million people so, given its central location in South Pennsylvania, Cresco has the potential to reach a broad swath of new consumers.

Last year, Cresco introduced its Good News brand in Pennsylvania. The initial offering from Good News is Sweet Troches (pronounced troh-kees), which are a type of product to be placed under the tongue. They come in six different flavors, each containing 10mg of THC.

Sweet Troches offers a range of medical marijuana items designed for dissolving directly in the mouth, and is considered straightforward and convenient to use.

The company has shown many times that it can grow its core brands and products in new markets to match demand while still keeping a strong market share. Cresco’s collection of brands continue to be held in high regard among consumers, and the firm’s highest share of market is still in Pennsylvania.

Does Cresco’s Financials Exhibit Strength?

During the last quarter of the financial year 2023, Cresco generated revenues of $188 million. Even as prices declined by more than 20% compared with last year, production and ultimately sales have remained high.

Cresco finished the year with solid profit growth and improved margins. For example, EBITDA improved by almost two-fold. In Q4 2023, Cresco’s adjusted EBITDA went up by 85.1% compared to last year’s number, reaching $54.83 million.

Management also succeeded in reducing more than $54 million in yearly adjusted SG&A versus the year prior while boosting growth, the number of units made and sold, as well as enhancing its product quality. At the end of the year, operating cash flow tripled as a result.

Additionally, Cresco reported a net income of $4.87 million, which is in contrast to the previous year’s net loss of $180.62 million. The company’s adjusted gross profit increased by 12.3% from last year, reaching $99.72 million.

At the same time, it made $27.1 million from its operations, which is a stark turnaround from the same quarter last year when it lost $143.48 million.

Where Is Cresco Growing?

In 2023, Cresco opened 16 new shops in Florida and Pennsylvania. These are areas with lots of competition, but Cresco managed to gain market share regardless.

In Pennsylvania, Cresco is not only known for having a big and efficient retail presence but also as the top producer of branded items, holding more than 16% of the market share. 

Looking ahead to 2024, analysts are watching the situation with adult use in Ohio very closely because Cresco has created a strong base there. Cresco has five dispensaries that generated more than double their expected revenue. It also owns a cultivation and processing facility of 70,000 square feet. 

Still in Ohio, Cresco is working to fortify its leading market position by investing in more facilities and retail locations. The number of stores will increase from 5 to 8 when it starts selling products for adult use. Meanwhile, in Florida, capital expenditures are increasing to grow market share.

Indeed, Cresco is paying close attention to when Pennsylvania and Florida will allow adult use because the market size is forecast to be $4 billion. The company stands in a strong place to take advantage of the three biggest upcoming state growth drivers in this sector as it invests in infrastructure in anticipation of the changes.

By 2025, the company aims to make 50% of its wholesale menu items from unique Cresco genetics that are developed internally, a further edge that should set the company’s products apart from rivals.

A long-term plan to grow capacity is in full progress now in order to grow plants for medical users and prepare for when it can also sell to adult customers without prescriptions.

Will Cresco Stock Recover?

The consensus forecast among analysts is that Cresco stock will rise by another 19.0% to a price target of $2.33 per share.

Since the beginning of this year, Cresco has already risen sharply by approximately 56% but if analysts are to be believed there is more fuel in the tank.

In terms of profitability, the company has a trailing-12-month EBITDA margin of 16.63%, which is 221% above the average in this industry of just 5.18%.

The trailing-12-month levered free cash flow margin is 2.70%, which is almost 3x more than the industry’s average of just 0.68%.

Capital expenditures as a percentage of sales for this period stands at 7.33% against an industry average that is lower, at 3.97%.

Another key metric, forward EV/Sales sits at 1.61x, which is 51.5% below the sector average. The forward EV/EBITDA ratio is 6.16x, which is 51.5% less than the typical industry level of 12.69x. The forward Price Sales ratio is at 0.96x versus the industry average of 3.42x.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.