Cresco Labs CRLBF Stock Forecast & Analysis

Cresco Labs CRLBF stock just announced the acquisition of Columbia Care CCHWF stock, a stock I just analyzed very recently.  This will create one of the biggest cannabis companies in the United States.  There will be accretive cost-saving measures that will go far to improving the metrics of the combined companies.  I wanted to put together the CRLBF stock forecast to see what Cresco Labs would be worth on its own.  I have done the same for Columbia Care.  When the two combine I will do Cresco again.  The discounted cash flow calculations are important for understanding value investing and learning how to invest in stocks.

In the meantime, Cresco Labs has yet to cross into net earnings profitability.  But, this is one of the cannabis stocks that has a big future ahead.  On its own, the metrics are there for profitability.  But, investments in CapEx and other unusual costs keep Cresco from getting there.  If you are playing the long game as a value investor, Cresco Labs has considerable assets to push the company to better margins through economies of scale.

CCHWF Stock Valuation & Lawsuit

However, I am not certain that the new deal is a done deal.  There is a pending lawsuit that the valuation for Columbia Care was not appropriate for CCHWF stock.  I agree with that as my analysis showed.  I had to get pretty creative to push the valuations lower, acting inconsistently, only to still show valuations that were above the acquisition price.

There are also other headwinds for Cresco Labs with this deal.  Many analysts immediately downgraded the stock and that should be a read for individuals holding CRLBF.

In the meantime, putting together CRLBF stock & CCHWF stock as one combined company means there will be operational cost savings and a far larger vertical foundation that will continually propel the stock.  An investor just needs to wait out the current thunder and lightning.

Downgrade to Original CRLBF Stock Target

I had just done a Discounted Cash Flow Calculation on CRLBF stock forecast back in the middle of April when the deal between Cresco Labs & Columbia Care was announced.  Based on the numbers then, I came up with a higher target than what I am targeting today, but minimal.  The drop was about $2.00 to CRLBF stock forecast.  The reason was that the numbers coming in are slightly softer than what was coming in previously.  I am not entirely certain Cresco will hit its numbers.  But, I will continually adjust as the year progresses.

Cresco Labs Financial Data

Cresco Labs Gross Profits

Revenue came in soft this quarter.  I have about 20 stocks that have reported so far for Q1 2022.  15 of these, or 75%, are lower.  Ouch.  Cresco Labs, being a bigger player, when they report lower numbers, it affects the entire bunch a bit more.  Simply, as COVID restrictions wane, people are heading outdoors more instead of being stuck at home and consuming cannabis products all day long.

This has been the case for the bigger cannabis players this quarter where gains were incremental; Green Thumb Industries GTBIF stock also reported lower numbers for Q1, 2022.  But, perspective is due.  The S&P 500 prints approximately 3.5% YoY increase in revenue.  Most cannabis companies are printing about 5% quarterly.  However, Cresco barely printed a gain at all for Q4, 2021, and no are about as flat as the state of Kansas for Q1 2022.  There was a bit surge of cannabis consumption from the COVID lockdown.  Now, COVID is endemic and bars & restaurants are opening back up.  The gains are not there anymore.  Cresco Labs is showing that.

Worse, cost of goods went up in Q1 and this affected gross margins on gross profits.  Cresco needs to push this metric.  Cresco Labs’ competition is printing gross profits between 60% – 65% on revenue.  For Cresco, an additional 5% of gross margin would translate to $10M more toward the bottom line this quarter alone.  So, on the one hand, companies can achieve these levels.  On the other hand, Cresco is behind the learning curve with how to grow a lot of quality cannabis profitably.  Not to say they cannot scale up with economies of scale and get there.

Cresco Labs Operating Profits

From an operational standpoint, Cresco Labs is almost at the sweet spot of where some of its big rivals sit.  Cresco printed 38.3% operating efficiencies.  The best companies print between 30% – 35% of operating efficiencies, or operating costs relative to revenues.  The minimal gains to be more competitive are there with scaling up revenue and maintaining vigilance with operating costs.

Then, there is the fact that with the acquisition Cresco Labs will be able to cut operating costs; you do not need 2 CEOs.  We saw this with Tilray and Aphria where there were substantial gains to be achieved there.  Something to look forward to, expect the combined companies to enjoy operating cost savings.  If there is continued organic revenue growth during these cost savings, then maybe Cresco Labs can be a leader in this metric.  Being so close is very positive.

However, that is just one of the steps of this process.  Eventually, with combined revenues with Columbia Care, Cresco is going to want to maintain its same level of operating costs, but double revenue.  That would get operating costs at 17.5% of total revenue which, that is the sweet spot for the broader S&P 500.

Cresco Labs EBITDA & Net Profits

For the past few quarters, Cresco Labs has printed about 21% EBITDA to revenue as a ratio.  I have plenty of examples throughout my listings where I can show companies doing far better than this.  EBTIDA to revenue for the S&P 500 is just slightly higher than this.  The best companies are printing in the upper 20s and lower 30s.  Cresco Labs will have to push to get there.

As I mentioned, there is the possibility to hit an additional 5% with gross margins.  And, maybe Cresco can save an additional 3% with operating costs (This, prior to the Columbia Care acquisition).  If this were to occur, the potential 8% gets Cresco up to about 30% revenue.  There are a few companies that are printing like this and some of them are the same size as Cresco.  This shows the possibility.  If Cresco could achieve these levels their profitability would be a real driver for CRLBF stock.

As for Net Earnings, Cresco Labs had an outsized tax bill to pay as well as other unusual items.  From COVID relief, the law allowed for deferral of paying taxes.  That bill was due and paid.  We have seen this with all of the cannabis stocks and every other US company.

Cresco Labs Cash On Hand

Coming in about the middle ground with cash to debt ratio, Cresco is well positioned with cash on hand.  And, its access to capital will ensure that Cresco can build up its reserves once it starts to turn a profit.  But, Cresco needs to start turning a profit.

Cresco Labs Total Equity

Whereas other competitors have been able to grow equity via asset increases and containing liabilities, from an organic standpoint, total equity has remained stagnant for Cresco Labs.  There are increases in assets, yes.  But, liabilities have kept pace.

Still, with $750M in total equity, this is something that can be built upon for future revenue.  I would want to see more increases in revenues with the healthy CapEx that Cresco employs.  And, with projects in development, eventually there will be revenue growth driven by the developments.

However, if this is a competition, which I believe it is, Cresco is not in 1st place in this metric.

Cresco Labs CRLBF Stock Forecast

Cresco Labs CRLBF Stock DCF

First, I downgraded my original assessment for the CRLBF stock forecast.  Last quarter, the numbers had me come up with approximately $22.50.  My numbers are coming in slightly less at about $19.75.  I emphasize that these are models, obviously.  When the market gets to taking off, when Cresco Labs up-lists to Nasdaq, things will be quite different.  And, this model may show when the market has gotten too far extended which, that may trigger some to exit.

For the CRLBF stock forecast, I used the same metrics as I used with CCHWF stock forecast for consistency purposes.  The numbers resulted in almost identical outlooks for both stocks that they are undervalued.  Both stock forecasts would put the target prices just above the highs from February.

It may be that we see a renewed interest in cannabis stocks all over again.  With Cannabis Federal Legalization upon us just again, most are too disgruntled to even be paying attention.  The market is likely to be caught off guard.  And, I believe because of this a potential surge in cannabis stocks is very likely all over again a la February 2021.  So, the CRLBF stock forecast is well within reason.  Afterward, basic fundamentals will prevail.

Truthfully, despite trying to be consistent, I actually believe CCRLB stock could go well above the $25.00 and maybe as high as $32.50 area in a market functioning more normally versus one so corrupted as it is.

Is Cresco Labs CRLBF Stock A Good Investment?

One of the things that stands out to me is that both CCHWF stock and CRLBF stock are undervalued.  A lot.  Both are approximately 85% – 95% undervalued.  Yet, the acquisition price of Columbia Care is being factored at a higher rate, almost double its current valuation.  However, Columbia is being acquired by CRLBF stock which is not being valued higher.  This is negative for current shareholders.

If CRLBF stock was fully valued, you would use 25% of the shares necessary to acquire CCHWF stock.  If I were a shareholder, I would prefer this.

The deal kinda stinks.  The fact that a slew of analysts downgraded CRLBF stock as they did immediately should fall upon nothing deaf.  The fact that CRLBF stock has fallen as it has afterward should also be enough for some to realize that there is something amiss.

Headwinds & Revaluation

Cresco Labs will have headwinds with regulatory aspects getting this deal done.  That may be costly.  But, in lieu of that, Cresco is expanding its foundation significantly, and immediately and expands into what totals to 16 markets.  There are some great expansionary aspects to this.

I believe that CCHF stock was improperly valued.  I think there are merits to the suit against the board.  But, maybe nothing comes of it.  In the meantime, the deal will take a lot to get done.  Then, once it is done, Cresco Labs will be set to grow into one of the biggest cannabis companies there is.

So, after all of the knocks are taken, and if there is no revaluation of CCHWF, Cresco Labs will pick up an acquisition at a fraction of the cost.  But, they are doing so with stock that is too low.  The costs will be absorbed.  And, Cresco Labs will advance forward.  CRLBF stock will move higher.

Cresco Labs will be a powerhouse company.  Once the dust settles on this deal and they proceed forward, once we get cannabis federal legalization, I believe that CRLBF will work through the negativity of this deal.