CCHWF - Cresco Labs Stock: Extremely Cheap But Likely To Languish

2023-05-26 14:00:43 ET

Summary

• Cresco Labs Inc. reported an ugly Q1 2023 with revenues falling 10% YoY.
• This MSO is likely to languish due to the Columbia Care merger struggling to complete divestitures needed for regulatory approval.
• Cresco Labs Inc. stock is cheap at 1.5x EV/S targets and even cheaper if the Columbia Care deal closes.

The pain in the U.S. cannabis market continues almost unabated despite extremely cheap values from most multi-state operators (MSOs) like Cresco Labs Inc. ( CRLBF ). Unfortunately, the company remains stuck in a merger with Columbia Care ( CCHWF ) with no resolution in sight. My investment thesis remains ultra Bullish on the MSO stock, though the stock is likely to languish until a resolution on the merger.

Struggles Persist

Cresco Labs reported a Q1'23 where sales fell nearly 10% from last year and 3% sequentially as follows:

The MSO faces the toughest scenario in the sector where sales are more branded-focused, and the wholesale market has become the toughest segment. Due to weak sales, most dispensary operators started pushing their own retail brands to boost sales and utilize cultivation capacity versus selling brands from competitors.

Cresco Labs was poised to utilize the combined business of Columbia Care to elevate retail focus while the MSO continues to open their own stores. During Q1, Cresco Labs opened 8 new stores in Florida and Pennsylvania, bringing the total to only 63. The merger was set to elevate retail sales from just below 55% for Cresco Labs in 2022 to over 70% on a combined basis.

The MSO has seen the adjusted EBITDA margin dip to only 15% in the quarter, leading to an EBITDA of just $29 million. Regardless, Cresco Labs still produced positive operating cash flows of $3 million while paying $32 million in tax payments for a business that wouldn't normally pay material taxes due to reporting GAAP losses.

While still a solid MSO, Cresco Labs isn't one of the better large ones now. The company reported a large revenue dip while the other top MSOs mostly reported sales grew YoY in Q1 as follows:

• Curaleaf Holdings, Inc. ( CURLF ) - 14.2%
• Green Thumb Industries Inc. ( GTBIF ) - 2.4%
• Trulieve Cannabis Corp. ( TCNNF ) - -9.2%
• Verano Holdings Corp. ( VRNOF ) - 12.3%

Investors should be careful turning too negative on the stock as a merger close or a turnaround in the market dynamics will favor the leading cannabis-branded business. In addition, if New York and other states ever successfully implement the expansion of retail licenses, Cresco Labs will benefit from a demand for more wholesale revenues.

The MSO now has a network of 1,600 dispensaries across a 10-state wholesale footprint. In the last quarter, branded unit volume was up 32% to 17.6 million.

Opportunity Ahead

While the MSO is still in the merger process, Cresco Labs will likely languish. The market doesn't like uncertainty, and the stock is hard to value without knowing whether to factor in a standalone business or one including the great growth opportunities of a combined company.

The major growth opportunities ahead are in the New York, New Jersey, and Virginia markets. The New York market is failing to launch while both New Jersey and Virginia are reliant on closing the deal with Columbia Care.

The smaller MSO is doing better due to access to the strong New Jersey market. Columbia Care reported Q1 revenues actually grew 1% to $125 million.

The company just opened 2 stores in Virginia and 1 in West Virginia to drive growth in the future while Columbia Care recently divested business in Missouri and closed stores in Colorado. As with other MSOs, the focus is solely on generating positive cash flows versus solely growing revenues like in the past.

The merger transaction going on for over a year is another negative part of these large deals. If Cresco Labs can close the deal, the large MSO will have a big step up on competitors unlikely to pursue the same route due to the lengthy period required to close the deal with so much change in the cannabis market taking place in the last year.

As a standalone business, Cresco Labs only has a market cap of $800 million now while revenues are trending around the same level. The MSO has net debt of ~$400 million, placing the EV at ~$1.2 billion, or just 1.5x sales.

The stock is hard to value based on the lingering merger, but the combined company only gets cheaper, with Columbia Care trading at a discount to other MSOs. The stock only has a market cap of $200 with an annual sales target of $500 million. The company has new stores opening in both New Jersey and Virginia, making the assets very appealing.

Takeaway

The key investor takeaway is that Cresco Labs Inc. is a cheap MSO stock that will rally with any positive industry news. The stock is even cheaper on the close of the Columbia Care deal, but the MSO is struggling to divest assets in areas like Ohio and Florida needed for regulatory approval.

Investors should use the weakness to load up on Cresco Labs Inc. stock, though CRLBF stock is likely to languish over the next couple of months while waiting on the closure of the merger.

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