Intrinsic Value Assessment of Cresco Labs

Struggling to find investment ideas? Read below to find out why Cresco Labs might deserve a spot on your watchlist.

Cresco Labs (CSE: CL) was founded in 2013 and is one of the largest multi-state, vertically integrated cannabis companies in North America. Vertically integrated meaning they're involved at every point in the seed to the sale process, this includes cultivating, manufacturing, extracting and packaging. This type of operation gives them the ability to ensure tighter quality control, ensure a better flow and control of information across the supply chain.

Cresco Lab offers a staggering 350 products through their suite of brands, which include Cresco, Reserve, Remedi, Mindys, High Supply, Good News and Floracal. Through these brands, they can cover every aspect of the cannabis market with their products.

Cresco Labs Dominates the US Market as the Largest Wholesaler with a Massive $90.5 Million Revenue this Year

Each brand creates a unique selection of products like liquid live resins, soft gels, lotions, fruit chews, chocolate, vape pens, popcorn and of course, cannabis in flower. It shouldn't be too hard finding these products either considering they're sold at over 700 dispensaries including the 22 dispensaries Cresco Labs operate in states such as Illinois, Pennsylvania, Ohio, California, Nevada, Arizona, Massachusetts, and New York. 

Cresco Lab certainly have all the hallmarks of being a dominant company, but are they worthy of our hard-earned cash?

Is Cresco Labs an investment-grade company?

Traditionally, companies don't see huge growth in their revenue for many years after being founded so it makes it difficult to identify if the company will find success. Cresco Labs is no exception.

It wasn't until July of 2020 when they first posted a positive Operating Income (not to be mistaken for Net Income) and started to see their revenue increase quite dramatically. Then in September 2020, Cresco Labs recorded total revenue of $153 million which is a huge improvement from the total revenue they recorded in September 2019, which was USD$36 million.

Cresco Labs Revenue Grows in Second Quarter 2020 Results

So, is it time the investment community started paying more attention to Cresco Labs?

As stated above, it operates every step of the process from the seed to the sale. This provides the company with the unique ability to control the supply and the quality of its product, a luxury not many other companies have.

Cresco Lab's goal of being a multi-brand operator was ambitious, its hard enough to create one successful brand but somehow Cresco Labs has been able to do it for 7, a number which they hope to increase.

This path hasn't come without its difficulties, as it's a very capital intense operation. It's the root cause of why Cresco Labs hasn't been able to post a positive Operating Income since inception. Don't expect to see their quarterly operating expense of $50 million to go down or even be maintained in the future.

The industry is young and management are beginning to see strong evidence of their ability to turn expenses into revenue which will only encourage them to to do it more and expand with the industry.

What risks does Cresco Labs face?

With the current operation, its easy to neglect areas of the business or miss incremental information. Cresco Labs has done well to scale up to this point but to be able to stay competitive, they will have to continue to grow which only creates more areas that require focus which, in turn, increases the chances of negligence.

The metrics one ought to be focusing on as Cresco Labs move forward, are ROE (Return on Equity), ROCE (Return on Capital Employed), and ROA (Return on Assets). This will help monitor how effective management has been and whether or not they have been able to continue the success they've been having.

But as it stands, the ROE & ROA metrics sit at -7.9% and -2.3%. Only the ROCE metric is positive, but at 2.3% it is far below what other cannabis companies are achieving such as Trulieve, who are achieving a 28% return on capital employed.

See my intrinsic value assessment of Trulieve here.

The cannabis industry is still very young as is Cresco Labs, their future is uncertain which makes an investment in the company risky. We can't forget about how the government hasn't really made their decision on the cannabis industry and could still regulate it heavily resulting in fewer earnings after these expenses are subtracted.

The bottom line

Cresco Labs has to be commended for its success in operating such a complex business. Operating expenses have taken a massive chunk of the revenue, but as we can see in the most recent quarterly financial results, that capital employed is paying off. It won't be long before they report positive earnings. At the time of writing, their trailing-twelve-month revenue is $355 million which is double what they achieved in 2019, but this has come at the cost of doubling their operating expenses to $187 million from $98 million.

It may not necessarily be a buy at this current point in time due to the uncertainty of the business and industry as well as a massive amount of hype surrounding the stock. But because of the company posing similarities to consumer product companies such as Nestle and Coke, it is certainly a company to follow closely as they infiltrate many dispensaries with their hugely popular products.

For the latest news and updates on Cresco Labs, click here

Disclaimer: Past performance is not an indicator of future performance.

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Mark Page
Mark Page

Mark is a UK born investing enthusiast based in Sydney. He has a keen eye for technical analysis and is paying close attention to the ongoing legalisation of cannabis for the health benefits, opportunities, and emergent industries that will follow.