Cresco reported solid annual numbers with significant gains YoY. Here, I am going to break down the financial data and show how this company’s stock, $CRLBF, could be worth a lot more in the future. Also, I have done an analysis on Bluma Wellness who is being acquired by Cresco. $BMWLF is a stock that on its own would be worth $6.00 in 2 years’ time. They will contribute 10% of Cresco’s revenues. Therefore, Cresco could be worth as much as $60.00 in just 2 years’ time. Further, Cresco just announced the acquisition of Cultivate, a Massachusetts vertical cannabis company with 3 more dispensaries. This will continually push revenues and earnings in the future.
In the meantime, although there was a recent run-up in cannabis stock prices, more recently there has been protracted selling:
My take on this selling is two-fold. First, valuations for “name-brand” cannabis stocks are too rich and they are selling off. This is pulling down all cannabis stocks, even the ones that are potential buys. The other view of this is that this will give someone who’s looking to get into an excellent company with a lot of potential a below-market buying price. $CRLBF is going up over the long-term. If the price were to ease back to about $7.50, you could buy nearly double the shares from just 2 weeks ago for the same amount of money. I’ll take that all day long.
Cresco Labs Revenues
Revenues printed 6% QoQ. That does not seem too impressive. However, for perspective, the S&P 500 prints all of 3.5% annual gains on average. Plus, the quarter before was some 60% QoQ. And, the $157M is 300% YoY. This is continuously impressive simply because of the overall growth and the ability to increase more and more.
Cresco is using its stock to acquire some of the revenue gains. This becomes a balancing act between what they are giving up (additional stock) and what they are gaining (increased revenues and profits).
A perfect example of this is the Bluma deal. Cresco is issuing stock to the Bluma shareholders in a straight swap of 0.0895 shares per share of Bluma. What Cresco is gaining is a very large footprint in a medical-only cannabis state with a vertical company that has 2 grow facilities, 8 current dispensaries, and 10 more on the way. The future value of the Bluma company on its own is some $6.00 per share in about 12 – 24 months’ time. I have done a fairly detailed analysis on Bluma to come to this valuation. I believe Cresco got an excellent deal out of this, especially if Florida were to flip to adult-use. The upside potential would be massive.
But, Bluma is getting involved in an excellent company that is growing rapidly with a very large nation-wide footprint. Bluma shareholders will do well over time from this.
All-in-all, the Bluma deal shows how Cresco is adding in revenues and are choosing excellent companies with significant upside potential.
Cresco Gross Margins
What I have found is that companies that are dispensaries are more likely to have higher margins. There is far less variability with a dispensary than with a grow facility where yield is, well, variable. Being vertical allows for companies to maintain some kind of consistency. At the same time, having your own brands outside of just being a dispensary, allows for premium margins should the company do well with its products.
Cresco is not only increasing revenues in a significant way but at the same time, its gross margins are some of the highest in the industry. I look at some 350 different cannabis companies at a time. 60% – 65% are what a company would be shooting for; this is the range of some of the best companies. Cresco is hitting above those levels showing what they are achieving.
This is leadership in a metric that is very important. Looking at these numbers, there was a one-off from previous that pushed margins up to 83%. At the same time, inventory write-downs pushed margins downwards to 30% in one quarter. As the chart shows, these are one-offs that are within the course of business for a company that is expanding rapidly and are non-recurring.
The average above shows that Cresco is maintaining its competitiveness and will lead in this metric.
Cresco Labs Operating Efficiencies
Whereas Cresco is doing excellent in gross margins, they are still carrying extra weight with total operating costs:
This metric involves economies-of-scale as well as fixed costs, so this is not something I would be concerned with. First, with fixed costs, as revenues increase, these fixed costs remain the same and therefore the percentage will decrease simply because of the increase in revenues.
But, the total metric itself is non-linear in the sense that as revenues increase some operating costs will increase simultaneously. What a potential investor hopes for is that the rate of growth of revenues outpaces the rate of growth of total operating costs. Given that, Cresco would be hitting competitive levels as an eventuality.
Cresco Labs Profits from Continuing Operations
Continuing operations saw one-time costs associated with what would be considered Cap-Ex:
This is where one of the major losses occurred within the financials for Cresco. Outside of this metric, and one other section of the financials, Cresco is printing solid numbers. Once they get to more consistency, where you no longer have to dig around for mainstream to find profits, then this will draw in buyers of $CRLBF.
Cresco Labs EBITDA & Net Income
For three straight quarters, Cresco has printed positive EBITDA earnings:
Cresco had two costs/write-offs that pulled EBITDA below the previous quarter’s numbers. Still, three positive quarters is just that, positive. Cresco is still building up its company and all of this will pay off. What is interesting is that Cresco nearly duplicated its previous quarter’s EBITDA number while at the same printed Cap-Ex, M&A, and other one-time costs structures.
Cresco Net Income
Without looking deep enough, Net Income looks depressing. But, as I mentioned, there were Cap-ex, M&A, and other cost factors that factored into this:
It may take a moment for Cresco to actually print net income positive. The very first step to that was EBITDA and they have been printing that for over 3 quarters now. As Cresco continues to expand it will continue to incur costs associated with that and the bottom line will continually stay negative.
But, it is an eventuality that net income will show up. I am going to be looking at future projections and factor this in.
Cresco Future Revenues
Cresco did not provide guidance for future revenues. It may be that they will continue to acquire companies and they simply cannot do a future equation. So, I put together a future outlook for the company based upon organic growth and kept it fairly modest.
Cresco just printed a YoY gain of 300%. I am doing an organic growth rate of only 50%. I feel that is very modest; here is the chart:
I used a gentle ~10% increase QoQ. Given this, we can look towards basic numbers and see how this works out and then do the math on the EPS.
- $800M Gross Revenues
- 65% Gross Profits of $520M
- 30% Total Operating Cost of $240M
- $280M Total Operating Profits
- $80M in Continuing Costs
- $200M for Net Profits
- 220M shares outstanding in the OTC market
- 375M shares outstanding in Canada
- EPS of $0.336 per share.
Given a 100x future earnings multiple, this puts Cresco at $33.60 per share by the end of the year.
This analysis is based upon Cresco achieving their base-case of an additional 50% in revenue and that amount is probably quite conservative on my part. Since they have not offered guidance, I’m not going to push my projection too far.
Also, Cresco needs to continue printing margins at industry high levels; I used 65%. Given cost metrics that Cresco is already hitting this will be very achievable.
Then there is the Bluma deal. I mentioned at the top of this analysis that Bluma could be a $6.00 stock and that they would be there in 2 years. Also, however, I stated that Bluma will be approximately 10% of total revenues for Cresco in the 2 years’ time that Bluma will need to get there. The math on this all lines up. Cresco will likely be above the $60.00 level in two years’ time, but also, the EPS multiple will begin to slow down considerably.
I can easily see $CRLBF printing above $33.60 by year’s end. And, I can see this powerhouse company continuing beyond in the following 12 months after that.
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