There’s a lot to like about Cresco Labs, but its debt still lurks in the shadows.

The evolution of the cannabis market in the U.S. has been a mixed bag for multistate operators (MSOs) and their investors thus far, with revenue growing but stock prices falling. As companies and investors are eager for any progress on decriminalization at the federal level, state-level sales are what’s keeping some afloat.

Cresco Labs ( CRLBF 2.40%) is one of those MSOs leaning on state sales to drive revenue growth and provide returns for investors. After the company released solid second-quarter earnings in August, average analyst projections have Cresco Labs stock climbing 130% over the next year. But should investors buy in on that projection? Image source: Getty Images. Quarterly sales growth could be a sign of the times

In the second quarter, Cresco brought in $218 million in sales, enough to rank it No. 5 among the top MSOs in the U.S., as noted by New Cannabis Ventures in its cannabis revenue and income tracker. What’s also intriguing about the sales total is that it represents both sequential quarterly and year-over-year growth for the period ended June 30.

And Cresco isn’t the only MSO finding some success during the quarter. All of the top six — seven out of the top eight operators if you include Columbia Care (more about them later) — enjoyed sequential quarterly and year-over-year growth in sales. Perhaps that’s because we have officially entered a time where more people smoke marijuana (16%) than cigarettes (11%) in the U.S. These are good signs for the industry and Cresco investors. An acquisition is planting seeds of growth

Among the top cannabis companies , Cresco is the No. 1 producer of branded cannabis products with leading share positions in the flower, concentrates, and vape categories, according to leading legal cannabis market research firm BDSA.

That position should hold its own after the company acquired former competitor Columbia Care back in March, and it is now working toward the expansion of Cresco’s U.S. footprint.

As the company prepares for continued growth, it’s focusing on the transition to recreational adult-use cannabis in seven major markets, including New Jersey, New York, Pennsylvania, Ohio, Virginia, Florida, and Maryland. Bringing Columbia Care dispensaries and production facilities into the fold gives Cresco exposure to all of these markets and leading positions in several.

As CEO Charles Bachtell stated on the company’s Q2 earnings call, this is arguably the highest-value footprint in cannabis, reaching 180 million Americans in 100% of the 10 highest projected 2025 revenue states. The acquisition more than doubles Cresco’s footprint, giving it a leading share position in five markets and optimizing its operational footprint. Short-term obstacles should give way to long-term gains

While the acquisition of Columbia Care takes shape at an operational level, Cresco is facing a few unrelated headwinds. Price compression, delays in store openings, and a shift by MSOs to utilize personal brands will likely impact wholesale revenue through the remainder of the year. This will likely impact top-line wholesale revenue, which may not be offset until 2023.

To Cresco’s credit, the company did maintain an adjusted gross margin of 53% against headwinds caused by prices that fell between 10% to 30% depending on the state. It did so while also maintaining its top share position in Pennsylvania and Illinois — the backyard of competing MSO Green Thumb .

In addition, the company is facing a debt of $390 million, compared to cash of $90 million. This could lead to the need for raising capital, which means share dilution could be on the way for investors if more shares are sold by the company. Share dilution could result in a drop in stock price.

If that happens, it would likely be a short-lived setback. The growth anticipated from new markets, combined with a larger footprint across all markets Cresco serves, should provide a foundation on which to build. Cresco has new store openings scheduled in Florida from the fourth quarter of 2022 through the first quarter of 2023, followed by additional openings in Pennsylvania and Illinois. The company is also enjoying a No. 1 market share in Massachusetts — its third $1 billion market with a leading share.

Analysts seem to be on board with the long-term growth potential of Cresco. The current 12-month average price target is $8.78, representing a potential 131% gain over the current per share price of $3.79. The risk/reward trade-off seems like a no-brainer to me in a burgeoning market for a stock priced […]

source Wall Street Thinks This Growth Stock Can Gain 131% in 2023

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