Why I Like Cresco Labs (OTCMKTS:CRLBF)

I last discussed Cresco Labs (OTCQX:CRLBF) here in early October. It had pulled back, and I thought it might be a buy. The stock is higher today than it was then, but a lot of good things have happened, including higher projected adjusted EBITDA and progress with rescheduling (and the elimination, consequently, of the 280E taxation). Despite this good news, the stock is up only 6.9% since that last article, and it has lagged several peers:

In this follow-up, I will discuss the Cresco Labs’ Q1, the changes in the analyst outlooks, the chart and the valuation.

Cresco Labs Q1

Analysts were projecting that the company would generate $183 million of revenue in Q1, with adjusted EBITDA of $47 million. Cresco Labs slightly exceeded the revenue projection, but the $184.3 million was down 5% from a year earlier. Adjusted EBITDA, though, was sharply higher than it had been expected to be at $53.2 million, up 82% from a year earlier.

The gross profit went up despite the sales decline, and the company reported a gross margin of 50.0%. Operating expenses fell by 23%, and operating income expanded by 712% to $29.2 million.

Cash flow from operations was $34.5 million, up over 10X compared to Q1 of 2023. The company reported free cash flow of $33.2 million compared to -$16.8 million a year ago. The surge in cash flow was due mainly to a big change in income tax payable that increased $16.1 million from year-end. A year ago, it had fallen by $14.4 million.

Looking at the balance sheet, net debt was reported at $396.5 million, down slightly during the quarter from year-end. This does not include $41 million of deferred taxes and $98 million of income tax payable. The current ratio at the end of Q1 was 1.36X, which is better than some peers. Tangible book value was -$151.8 million.

The Cresco Labs Outlook

After the strong quarter, analysts raised their outlooks. Ahead of the report, analysts, according to Sentieo, were expecting 2024 revenue to be $744 million with adjusted EBITDA of $194 million. Now, they project that revenue will grow -3% to $745 million and that adjusted EBITDA will increase 18% to $204 million.

For 2025, they have raised their expectations from revenue of $793 million and adjusted EBITDA of $204 million to adjusted EBITDA of $217 million, up 6%. Expected revenue of $793 million, up 6%, is the same as before. This would be a margin of 27.3%. The projected margin is a bit lower than peers, but the growth is also a bit stronger.

The Cresco Labs Chart

I pointed out above that Cresco Labs has lagged its peers since 10/6. The MSO stocks started to get strong on 8/30, when the Department of Health & Human Services revealed that it had instructed the DEA to change cannabis from Schedule 1 to Schedule 3. Since 8/29, the five Tier 1 MSOs have soared, but Cresco Labs has been below the average of the five:

Looking back over the past three years, the relative move of Cresco has been the worst:

Looking at just the Cresco Labs chart, the stock currently trades below its March 2020 closing low. Over the past year, the stock has increased 9%, the lowest of the Tier 1 MSOs. It is near its 150-day moving average:

I see resistance $2.00 to $2.10 and support at $1.60 to $1.70.

Cresco Labs Has A Cheap Valuation

Cresco Labs has been underperforming its peers, but its estimates have gone up. The valuation is low to its peers, especially Curaleaf (OTCPK:CURLF), which I have as a Strong Sell:

Trulieve (OTCQX:TCNNF) and Verano Holdings have slightly lower valuations, but I have written about them and explained my concerns. I think that Green Thumb Industries (OTCQX:GTBIF), which I upgraded to Neutral recently, has a better balance sheet and should trade a bit more expensively, but the gap seems too large currently.

In that October piece, I shared a year-out target of $3.55 then based on an enterprise value to projected adjusted EBITDA of 10X. Ahead of the Q1 report, I shared with the members of my investing group an end-of-2024 target based on 8X, which worked out to $2.74.

I am still using 8X the projected adjusted EBITDA for 2025, and this works out now to be $2.94, which is up 61.5%.

Conclusion

I added Cresco Labs this week to my Beat the American Cannabis Operator Index model portfolio, and it is 11.7%, which is a bit higher than its weight in the index. It is the only Tier 1 MSO that I include at this time. I am looking to add it to the Beat the Global Cannabis Stock Index model portfolio at a lower price. I prefer a couple of Tier 2 names and also another one. That model portfolio currently has a 46% allocation to MSOs, which is higher than the index.

If rescheduling fails to take place, it could be a problem for Cresco Labs and its peers. I think that my target, based on a multiple of 8X, could prove to be too low, especially if the NASDAQ or NYSE moves to allow the MSOs to trade on these exchanges.

While the stock is up 34% year-to-date, it looks reasonably valued relative to its peers and has done very poorly in price relative to them over longer periods of time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.