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Despite trading at a discount to its peers, this company is well-positioned to benefit from various dynamics, presenting a potential opportunity for investors. A Monday morning note from Zuanic & Associates, rates Cresco Labs (OTC:CRLBF) as “Overweight” among the top five multi-state operators (MSOs) in the U.S.
"Cresco's valuation discount is not entirely warranted, given its significant upside from regulatory changes and the strides it has made on the profitability front," said senior analyst Pablo Zuanic.
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In terms of valuation, Cresco, one of the top five multi-state operators (MSOs), has a CY24 EV/Sales multiple of 1.7x, lower than the average of its peers, which range from 1.9x to 3.0x. Its EV/EBITDA ratio is 5.9x, while others, like Curaleaf (OTC:CURLF), reach 12.9x.
This lower multiple, combined with the company's strategic positioning, minimizes potential downside risk. "Cresco's valuation metrics relative to its peers reflect a mismatch in the market’s perception of its potential," Zuanic wrote.
According to Zuanic, Cresco’s financial performance in Q2 2024 underscores its efficiency-focused strategy, with sales of $184.4 million remaining flat but maintaining a gross margin improvement to 51.4%, up from 50% in the previous quarter.
Adjusted EBITDA margins were stable at 29%, and operating cash flow for the first half of 2024 reached $54 million, compared to $21 million in the same period last year.
Zuanic also emphasized that Cresco has no significant debt maturities until August 2026, with financial net debt standing at $395 million.
Key opportunities lie in Cresco’s footprint in states like Ohio, Florida, and Pennsylvania. In Ohio, the recent start of adult-use sales in August 2024 signals market growth, with the potential to expand three to four times beyond its current $480 million medical cannabis base.
Zuanic noted, "The growth trajectory in Ohio is slightly ahead of what we saw in Maryland, and Cresco's market share should benefit from upcoming regulatory changes." Meanwhile, Florida could see a transition to adult-use pending a voter decision in November, and Pennsylvania is expected to pass recreational cannabis legislation within the next 12 months.
"Ohio’s non-medical sales began on August 6, 2024, and early data shows $75.6 million in combined recreational and medical sales in the first 26 days, implying an annualized run rate of $1.06 billion—more than double the previous medical market size of $480 million. Once full adult-use rules are in place, we expect the market to expand 3-4x from its current base," Zuanic wrote.
He also noted that in 2Q24, Cresco's flower volumes increased by 2% quarter-over-quarter in Florida, while extracts saw a 27% rise, outperforming state averages. Cresco has maintained its store count at 33 for the past year in the Sunshine State, and Zuanic expects expansion decisions to be made after the November vote on adult-use cannabis.
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