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Cresco Labs Stock: Worth the Wait (CRLBF)

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We’re bullish on Chicago-based Cresco Labs Inc (OTCQX: CRLBF). The profits are worth the wait for retail value investors. Investors will need patience until Cresco fully absorbs a mega corporate takeover. We wrote About Cresco Labs before, and we own stocks.

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In mid-July, we spoke and exchanged emails with a senior investor relations representative from Cresco Labs. The representative informed us that Cresco is set to execute the $2 billion all-stock acquisition for rival MSO Columbia Care (OTCQX: CCHWF) before the end of the year. November 4, Cresco Labs and Columbia Care jointly

announced the signing of definitive agreements to divest certain New York, Illinois and Massachusetts assets (the “Assets”) to an entity owned and controlled by Sean “Diddy” Combs (the “Transaction”). The Asset Divestiture is necessary for Cresco to complete its previously announced acquisition of Columbia Care (the “Columbia Care Acquisition”). The transaction is expected to close concurrently with the closing of the Columbia Care acquisition. The total consideration for the Transaction is a maximum amount of USD 185,000,000 (the “Purchase Price”).

The announcement warns that legal hurdles remain, but management at both companies is optimistic. Additional assets are targeted for disposal by other means. Both boards have approved the remaining plans and are awaiting review clearances from committees and government regulators.

In 2022, there were mergers and acquisitions valued at $2.57 billion. The Cresco/Columbia deal nearly doubles that number.

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Cannabis merger and acquisition activity (mjbizdaily.com/marijuana-mergers-and-acquisitions-cool-in-2022/)

This is a huge undertaking for Cresco shareholders. Cresco’s market capitalization is $1.33 billion. Columbia Care’s market capitalization is $648 million. Both companies’ share prices fell last year, so investors won’t know the final numbers until the deal is revealed. Columbia shares plunged 52% last year to $1.50. The 52-week high was $3.86 at the end of 2021. Cresco Labs’ stock price has fallen 60% in the past year; it is down -52% over the 10 months of 2022. The S&P/TSX Cannabis Index is down 66.75% over the last 12 months.

Footprints are increasingly important in the cannabis business. Cresco is number one in Illinois and Pennsylvania, where Columbia Care has very little presence. Columbia is a leader in Colorado and in places where Cresco has little or no operations. Where products overlap, Cresco’s strategy is to market them as better, better and good. We don’t know yet if Cresco will rebrand Columbia retail stores with Cresco Sunnyside signage.

Risks

In our last article, we predicted that the Cresco stock price would hover around $3. A recent Evaluation average analyst price targets put it in the $10 range. We saw a value of over $15 per share. But we warn of the need to be conservative. Basing a target price on historical multiples (PE and PB ratios, price to cash flow, past returns and growth numbers) ignores the risks in a mega-company like this.

A huge risk threatens investors. Management has built a giant operation with good revenue growth based on customer service satisfaction. We think management can do it again, but this is a huge mega-company, taking risk tolerance to a new level for what will be the biggest company in a highly regulated industry.

Other factors are also at play. The cannabis industry is under pressure from federal regulations. State governments that have legalized marijuana are ecstatic on tax revenue. The federal government, however, refuses to decriminalize cannabis; it prevents businesses from banking money and making loans, using wireline/internet services to process transactions, transporting products across state lines, and marketing cannabis. It is unlikely that this situation changeespecially if a more conservative Congress is elected in the midterm vote.

Cannabis stock traders use non-traditional trading sites. We had an experience where a stock advisory website declined articles about cannabis stocks. Despite the enticing comments from some circles, we do not see the regulations becoming more flexible. Revenues will not grow as fast as they otherwise could.

Another caveat for shareholders is Cresco’s debt level. Cresco Labs has a higher cash-to-debt ratio than 82% of others in its industry. Its debt/EBITDA ratio is close to the worst ratio. The same applies to Cresco’s debt interest coverage capacity.

A final concern is the asset sale price of $185 million. Early estimates the suggested divestments will yield between $250 million and $500 million. More money will come with more sales to advertise. Will they generate $100 million or more? The company representative we spoke to informed us that a portion of the proceeds from the divestitures will repay the debt. Other income will be for working capital and to cover capital expenditures that Cresco incurs to acquire and modernize Columbia’s assets (CAPEX). Will there be enough?

The next earnings report from Cresco Labs Date is November 15, 2022. Columbia Care will report the third quarter on November 14, 2022.

Businesses

Cresco Labs and Columbia Care are vertically integrated, multi-state cannabis operators. The companies grow, manufacture and distribute brand name packaged consumer products and medical marijuana. Cresco offers 350 products and more than 5,000 brand SKUs.

  • Cannabis in vapes, live resins, disposable pens and extracts under the Cresco brand
  • Vape carts, vape pens, flower, popcorn, shake, pre-rolls, shorties and concentrates under the High Supply brand
  • Vapes and gummies under the Good News brand
  • Vapes and edibles under the Wonder Wellness Co.
  • Tinctures, capsules, ointments and sublingual oils are sold under the Remedi brand and the Reserve brand
  • Sale of cannabis flowers under the Cresco Labs and FloraCal brands
  • Mindy’s Edibles manufacture and sell cannabis chocolate and caramel confectionery, fruit gummies, hard candies and taffy under the Kiva brand which also produces cannabis-infused edibles including chocolate confectionery, gummies, mints and pies.
  • Other cannabis-infused edibles are sold under the sunny side brand, which is used as a name for company outlets.
  • The company has a healthy-sized wholesale business selling bulk and finished products to other cannabis distributors, as well as company-owned retail channels in many states.
  • SEED™ Social Equity and Educational Development™ is to develop concrete ways of accessing the industry for these communities. SEED’s work throughout the year focuses on three pillars: business development, education and workforce development, and restorative justice.

Cresco Laboratories operates in 10 states, where it has 21 production sites. It holds 54 retail licenses and owns 54 dispensaries. Columbia Care has licenses in 18 US jurisdictions and formerly in the EU. It operates around 100 dispensaries and 32 cultivation and manufacturing sites. Columbia has similar brand names and product lines. Both have valuable proprietary technology platforms.

Evaluation

Seeking Alpha authors and Wall Street analysts agree with us that Cresco Labs shares present serious potential upside opportunities. The Quantitative assessment de SA has been upgraded to hold this fall after strong selling ratings through much of June and July.

Care British Columbia

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Columbia Care Grades Factor (seekingalpha.com/symbol/CCHWF)

Cresco Laboratories

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Cresco Labs factor grades (seekingalpha.com/symbol/CRLBF/ratings/quant-ratings)

EPS will be a penny-per-share loss in Cresco’s next quarterly report if sales fall short of expectations. Some States Report Softer Than Expected Marijuana Sales, but the prevailing sentiment is that 2022 revenues will grow by 7% to 10%. Cresco’s three-year EBITDA growth rate is over 70% of its competitors. We expect it to improve over the next three to five years. Gross margin was last reported at 50%. The operating margin is around 12%. The net margin improved in the last quarter. We expect the trend to continue.

Carry

More states will legalize adult use. Tax collections are too attractive to ignore. The biggest advantage of the legal market is the purity of products in an age where drugs are cut with killer ingredients. 92% of Americans do not support any restrictions on the availability of medical marijuana. Uses for medical cannabis are expanding.

Cannabis-derived ingredients are appearing in supermarkets beverages. A food company that Warren Buffett owns invested in a cannabis business.

best cannabis products

Top Selling Products (flowhub.com/cannabis-industry-statistics#:~:text=The%20cannabis%20industry%20supports%20428%2C059,cannabis%20as%20of%20January%202022)

The industry already supports more than 428,000 jobs. It has created nearly 300 jobs a day in 2021. The new US Cannabis Council is an association of companies pushing for legalization and other issues. Medical marijuana is leading the way and its uses are expanding; once a state authorizes marijuana for medical purposes, there is little time between legalizing medicine and recreation.

Cresco Labs and future subsidiary, Columbia Care, are vertically integrated operators. A high percentage of farms are in agriculture to grow cannabis. We remain moderately bullish on Cresco Labs, but the risks have increased with the mega-company. If you’re not buying cannabis stock for personal reasons, keep in mind Dr. Seuss’ quip that “you’ll miss out on the best stuff if you keep your eyes closed.” We are not going back to prohibition.