In the face of the pandemic, the cannabis grower, manufacturer, and retailer Cresco Labs (CRLBF +7.53%) is moving full-steam ahead with its plan to master the cannabis value chain in the American midwest. Since its founding in 2013, Cresco has maintained aggressive growth by repeatedly purchasing smaller regional medicinal and recreational cannabis companies and expanding its operations into Canada. As a result of long-term investment in its distribution capabilities, Cresco's distribution network is the one of the most robust in the U.S., with a reach of 21 dispensaries across 11 states.
In areas like Chicago, Cresco was the first company to sell recreational and medicinal cannabis all-online in compliance with social distancing measures, indicating that it is a trend-setter in the space. Furthermore, Cresco's major markets in the American midwest are projected to grow substantially in the next five years, and this growth will probably continue in the face of the ongoing pandemic. To gear up to serve the projected growth in demand, Cresco is expanding its leadership team as well as its rank-and-file labor force in the face of serious year-over-year contractions in its enterprise value and a collapsing retail sector. Investors seeking a long-term growth stock should take heed: Cresco won't be an undiscovered gem forever.
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Even now, Cresco is growing regional production and distribution capacity
In terms of planned increases to its productive output, Cresco is preparing for high demand during and after the pandemic. In mid-April, Cresco completed the construction of a cannabis cultivation facility with 180,000 square feet of growing space, massively expanding the company's footprint to a whopping 215,000 square feet. Under its growing license, Cresco can cultivate as much as 630,000 square feet of space in Illinois alone, leaving the company with plenty of additional room to scale its production.
Primary production isn't the only segment of the value chain where Cresco is particularly strong. Cresco is notable for being more vertically integrated than its competitors as a result of its acquisitions, such as when it purchased the distribution company Origin House for $850 million in April 2019. In practical terms, emphasizing vertical integration in its operations means that Cresco is significantly less vulnerable to pricing surges for raw materials as well as labor. Furthermore, vertical integration also enables Cresco to grow its operations at its own pace rather than waiting for suppliers, distributors, or local retail labor pools to catch up to its requests for more plants or more logistical capacity, which is especially valuable during the unpredictable conditions of the pandemic.
Buy in and buckle up
For investors, Cresco may still seem like a risky marijuana stock despite its voracious expansion, wide reach, and a favorable long-term market. While the company posted 186.9% quarterly revenue growth year-over-year, it has never been profitable. Amidst its acquisitions and expansion initiatives, Cresco's stock has performed poorly during its first year of life being traded on the market, losing more than half of its value between September and April.
Regardless of its present stock price, the company's $73 million in cash on hand is enough to keep the lights on for two years given its reported cash outflows. In the long term, the pandemic may slow Cresco's expansion of capacity, but it's unlikely to make a dent in the consumer demand for cannabis, so Cresco can look forward to unimpeded expansion once the pandemic ebbs.
For the moment, investors who buy and hold Cresco should do so with the understanding that it may take five years before the purchase breaks even. Look carefully at Cresco's 2019 earnings report on April 27 to see the latest information on the company's fundamentals, but don't be surprised if there isn't a major improvement regarding its profitability.
Investors seeking an alternative to Cresco might find Green Thumb Industries (GTBIF +7.88%) to be appealing, but its lack of ambition regarding acquisitions makes it a less favorable option overall.
