Cresco Labs (CRLBF) was likely expecting 2020 to be a strong year not just for itself but for the cannabis industry as a whole. With more states -- including its home base of Illinois -- allowing cannabis use, sales growth was supposed to soar. But while there will still be growth, it could prove to be underwhelming as people are losing their jobs as a result of the coronavirus pandemic, meaning they'll have less money to spend on marijuana.
A lack of growth could be a serious problem for Cresco, because it means cash may be scarce this year. Let's take a closer look at the company's financials to see whether it's in a good position to handle this adversity or if investors should consider selling their shares today.
Will cash burn cripple the company?
The most recent results issued by Cresco came back in November, when it reported its third-quarter earnings. There, investors saw the company's cash balance, including its restricted cash, fall from about $94 million on Dec. 31, 2018, to just under $82 million on Sept. 30, 2019.
During that time, Cresco spent $105 million on its operating and investing activities. And it raised more than $55 million by issuing shares and warrants; otherwise, the cash bleed would've been even worse.
Image source: Getty Images.
Cresco can, and likely will, reduce capital spending and other unnecessary expenses during the pandemic. But whether it will be enough to stay afloat is the real question. The stock is down by more than 50% in 2020, and that will make any subsequent raises of cash through the equity markets more challenging. Even the Horizons Marijuana Life Sciences ETF (HMLSF 0.62%) is only down about 38% since the beginning of the year.
Another challenge for the company is that with cannabis still illegal at the federal level, obtaining a loan may prove to be a struggle. Many financial institutions don't want to do business with the cannabis industry out of fear that there may be repercussions from the federal government for doing so.
And the federal government has also indicated that while it's willing to help businesses struggling from the coronavirus pandemic, companies that run federally illegal operations won't be eligible. Even companies that work indirectly with the cannabis industry could be ineligible from receiving assistance.
And that's why the industry is hoping individual states can help cannabis companies. At this point, though, investors should expect no help for Cresco or other U.S.-based pot stocks during this pandemic.
Does this mean investors should avoid Cresco Labs?
Cresco Labs isn't in a unique position -- other cannabis stocks will also be fighting to stay alive while the pandemic keeps people home and out of work. The biggest problem is that the pandemic doesn't look to be anywhere near over; it could take several months before any sort of normal operations resume in the economy, and even that's an optimistic estimate. By then, people may have accumulated significant debt along the way, and jobs may not be readily available, especially as many businesses may shut down for good.
Without a strong economy, the cannabis industry may continue to struggle. That means a company like Cresco Labs will have to continue relying on its own stash of cash to get it through these tough times. Given the $82 million or so on its books as of Sept. 30, the company may be able to last well over a year. That's assuming it continues with a burn rate of $19 million worth of cash through its operating activities over nine months, which is what Cresco reported in Q3. But if you factor in any investments and capital spending, the number of months it can last on its own supply of cash will start to dwindle.
If a pot stock can last at least a year, then I'd wager it's in good shape financially. And that's where Cresco looks to be today. If the company slashes costs and aggressively conserves cash, it may be able to avoid issuing shares and diluting its shareholders even if the pandemic lasts for several months, perhaps even a year. The danger for investors is that in the meantime, the stock may continue to fall further in price. It may take a long time for Cresco's stock to recover, and investors who aren't willing to hang on for at least a year or longer may be better off selling their shares today.
