Cresco Labs CRLBF stock upside potential to $33.00

If you are looking for an excellent company for cannabis investing, Cresco Labs CRLBF stock is one of the top cannabis companies in the industry and reported solid annual numbers with significant gains YoY.  I wanted to break down the financial data and show how this company’s stock CRLBF stock, could be worth a lot more in the future.  Also, I have done an analysis on Bluma Wellness who is being acquired by Cresco.  Bluma Wellness 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.

Cresco Labs CRLBF Stock – Cannabis stocks to watch for cannabis investing

I have always considered Cresco Labs CRLBF stock a cannabis stock to watch.  However, in the meantime, although there was a recent run-up in cannabis stock prices, more recently there has been protracted selling.  Perhaps this is an opportunity to acquire a superb company at a discounted rate?

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 stock 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.

The major S&P 500 is running up to new, all-time highs almost every hour.  This, in turn, is keeping individuals from jumping into cannabis stocks.  After all, if you are currently holding a more mainstream stock and it is making new, all-time highs along with the broader stock market would you have any incentive to get into any new stocks?

Even if a cannabis stock were a cannabis stock to watch this does not necessarily mean that investors are lining up for this.  But, that also means that if you are accruing a list of cannabis stocks to watch, these cannabis stocks are generally being overlooked.

This is an opportunity if someone is willing to put in due diligence and determine what stocks may, or may not have underappreciated value.

Starting Cannabis Investing – Cresco Labs Financial Data

As far as cannabis investment and cannabis companies go, there is a reason why Cresco Labs CRLBF stock is one of the top cannabis companies.  Picking through the financial data will show why.

Fortunately, we have a good idea of what Cresco Labs will do with revenues over the next few quarters.  Expectations are $800M for 2021 in revenues.  From this, we can break down EBITDA profits and net earnings.  But, it is also important to point out the less-than-obvious: Margins we have now are not going to be the same.  As Cresco Labs increases revenues they should also increase margins.  And, despite the fact that Cresco Labs will be increasing revenues and gross margins, operational costs are likely to increase but at a slower pace.

I could see improved metrics moving forward with Cresco Labs keeping them as one of the

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 nationwide 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.

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.

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.

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 stock.

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.

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 Labs CRLBF Stock Future Projections

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 toward basic numbers and see how this works out, and then do the math on the EPS.

How to break down cannabis companies for cannabis investing

Whenever I break down financial data I systematically look at a few things to start for cannabis investing.

• $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 Labs CRLBF stock at $33.60 per share.  For one of the top cannabis companies in the sector for cannabis investing, this is a solid move upward.

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 stock 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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