Cannabis stocks are all set to explode if the U.S. government legalizes weed for recreational use. Right now, more than 35 states in the country have legalized the use of medical marijuana while recreational cannabis use is permitted in 16 states. In case cannabis is legalized in the U.S., it will allow producers easier access to debt capital in order to fund their expansion plans, making stocks such as Cresco Labs (OTC: CRLBF) top bets right now.
Cresco Labs is a cannabis giant
Cresco Labs is a multi-state operator with a presence in 10 states in the U.S. It has 47 retail licenses, while owning 20 production facilities and 37 dispensaries, making it one of the largest pot producers in the world. Cresco Labs is a vertically integrated cannabis producer and its offerings are sold in 700 dispensaries all over the country, which shows that it is a major wholesale player too in this space.
In the fiscal first quarter of 2021, Cresco sales rose by 169% year over year to $178 million. Its wholesale business derived 54% of total sales. This business saw sales increase by 151% year over year to $96 million while retail sales grew 193% to $83 million in Q1. Cresco’s retail business includes medical and recreational cannabis sales in the U.S. as well as vape sales north of the border.
While profit margins are low in the wholesale business, it remains a key revenue driver for Cresco Labs. Unlike several other cannabis companies, Cresco Labs reports a consistent profit.
The company’s sales have grown from just $43.5 million in 2018 to $476.25 million in 2020.
Cresco’s robust revenue growth in 2020 was attributed to the legalization of cannabis in Illinois, where it operates 10 dispensaries. Illinois generated $1 billion in legal cannabis sales last year with recreational cannabis accounting for $669 million of total sales. Research reports forecast recreational cannabis sales to touch $1 billion in 2021 in the Land of Lincoln.
This allowed Cresco to report an operating profit of $55.8 million last year compared to an operating loss of $34.25 million in 2019. In the first quarter, Cresco’s adjusted EBITDA expanded to $35 million, up from $16.5 million in the year-ago period.
The recent wave of legalization in the U.S. has helped the marijuana heavyweight to report robust growth in both revenue and profits. This trend is likely to continue going forward as Cresco operates in six of the 10 largest states (in terms of population) such as California, Florida, and New York.
Adjusted profit is on the horizon
Similar to most other marijuana producers, Cresco Labs is also investing heavily in acquisitions. Earlier this year, it acquired Verdant Creations that has four dispensaries in Ohio as well as Cultivate Processing that has two dispensaries in Massachusetts.
Cresco also completed the big-ticket acquisition of Bluma Wellness which is a large cannabis operator in Florida, giving it access to the Sunshine State, a billion-dollar market for pot producers. Bluma already has eight dispensaries in Florida and has licenses to open seven other outlets in this state.
These acquisitions might allow Cresco Labs to increase sales by 81.9% year over year to $866.31 million in 2021 and by 40% to $1.21 billion in 2022, according to consensus estimates. Wall Street also expects the bottom line to improve from a loss per share of $0.24 in 2020 to earnings of $0.02 in 2021 and $0.31 in 2022.
Further, Cresco Labs remains on track to achieve annualized revenue run rate of over $1 billion by the end of 2021.
Cresco stock will attract value investors too
Cresco stock has gained 69% in market value in less than three years. However CL stock is also down 49% from all-time highs, allowing you to buy the dip. Cresco Labs stock is valued at a market cap of $2.31 billion which suggests its price to sales multiple is less than 3x, making it one of the cheapest stocks on the market.
Analysts tracking Cresco have a 12-month average price target of $19 for the stock which is 140% higher than its current trading price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
