Despite trading at a discount to its peers, Cresco Labs (CRLBF) is attracting attention from analysts at Zuanic & Associates, who rate the company as “Overweight” among the top five multi-state operators (MSOs) in the U.S. This positive outlook stems from Cresco’s potential to benefit from various favorable market dynamics, making it a compelling investment opportunity.
Zuanic & Associates believes Cresco’s discounted valuation is unjustified, highlighting its strong upside potential from regulatory changes and its impressive track record of profitability. The company’s CY24 EV/Sales multiple of 1.7x falls below the average of its peers (ranging from 1.9x to 3.0x). Its EV/EBITDA ratio of 5.9x also significantly lags behind competitors like Curaleaf (CURLF), which boasts a 12.9x ratio. This lower valuation, combined with Cresco’s strategic positioning, mitigates potential downside risks for investors.
In the second quarter of 2024, Cresco demonstrated its efficiency-focused strategy, reporting sales of $184.4 million while maintaining a healthy gross margin of 51.4%, an improvement from the previous quarter. Notably, adjusted EBITDA margins remained stable at 29%, and operating cash flow for the first half of 2024 reached $54 million, a significant increase from $21 million in the same period last year. Cresco’s strong financial performance, coupled with its manageable debt structure (no significant maturities until August 2026 and financial net debt of $395 million), further solidifies its position as a stable and financially sound company.
Key growth opportunities for Cresco lie in its operations in Ohio, Florida, and Pennsylvania. Ohio’s recent launch of adult-use cannabis sales in August 2024 presents a significant growth opportunity, with the market projected to expand three to four times beyond its current $480 million medical cannabis base. Analysts at Zuanic & Associates believe Cresco is well-positioned to capitalize on this burgeoning market, anticipating increased market share as a result of upcoming regulatory changes. In Florida, adult-use cannabis legalization is anticipated following a voter decision in November. Pennsylvania is also expected to pass recreational cannabis legislation within the next 12 months.
Cresco’s strong performance in Florida, evident in its 2% quarter-over-quarter increase in flower volumes and a remarkable 27% rise in extracts sales (outperforming state averages) during the second quarter of 2024, further supports its strategic positioning. While Cresco has maintained a consistent store count of 33 in Florida over the past year, expansion decisions are expected to be made following the November vote on adult-use cannabis.
Cresco Labs’ commitment to profitability, combined with its strategic footprint in key growth markets and a strong financial position, makes it a compelling investment opportunity for investors seeking exposure to the evolving cannabis sector.
