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3 Reasons to Buy Cresco Labs, and 1 Reason to Sell

By Sushree Mohanty - Dec 1, 2020 at 9:07AM

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This Canadian pot stock has revenue growth, positive EBITDA, and financial stability to boast about. Is there any reason for worry?

The coronavirus pandemic has dragged on revenue and profits across sectors and around the world. Surprisingly, the marijuana sector has been an exception; U.S. pot companies in particular have seen sky-high sales amid the crisis due to the growing demand for pot, both medical and adult-use. Cannabis, which was declared an essential item during lockdowns, is known to help with anxiety and stress. 

And these businesses now have all the more reason to celebrate, as more states have been added to the legal cannabis list after November's elections. A total of 35 states and the District of Columbia have now made medical cannabis legal, while 15 states and D.C. have done so for recreational cannabis. This provides immense opportunities for U.S. cannabis companies to expand both their reach and their revenue. One such business, Illinois-based Cresco Labs ( CRLBF 1.36% ), saw particularly impressive revenue growth in its third-quarter fiscal 2020 results, reported Nov. 18. Here are three reasons this stock is worth investing in for long-term returns, plus one potential reason to reconsider.

Gloved hands holding cannabis plant

Image source: Getty Images.

Outstanding revenue growth

Cresco Labs' wide array of medical and recreational marijuana products are sold under the brand names Cresco, Reserve, Remedi, Good News, and High Supply. It operates through two segments, retail and wholesale. Being a vertically integrated multistate cannabis operator has been an upside for Cresco, allowing it to control its supply chain and avoid related problems amid the COVID-19 pandemic.

With a market cap of just over $2 billion, this company has solidified its footprint in nine U.S. states, with 15 production facilities holding 29 retail licenses. All this led to staggering revenue growth for the third quarter, in which sales were up a whopping 323% year over year, from $36.2 million to $153.2 million. The company saw growth in both wholesale revenue, which jumped as expanded capacity in Illinois and Pennsylvania and strong growth in California brought in more product, and retail revenue, with sequential same-store sales rising. Two new stores in Illinois have been particularly strong contributors to higher retail revenue.

Another quarter of positive EBITDA

Higher revenue and lower costs helped Cresco achieve another quarter of positive EBITDA (earnings before income, tax, depreciation, and amortization). Adjusted EBITDA jumped to a striking $52 million, up from $11 million in the year-ago period. The positive EBITDA can be attributed to lower SG&A (selling, general, and administrative) expenses, which were down to 30% of total revenue in Q3 from 70% the year before.

Consistent positive EBITDA shows that a company knows how to handle its operating expenses, and Cresco management's ongoing effort to reduce costs is demonstrated in its EBITDA numbers. Meanwhile, its Canadian counterparts Canopy Growth ( CGC 1.80% ) and Aurora Cannabis ( ACB 2.15% ) are struggling to keep costs lower and achieve positive EBITDA.

Financially stable enough to expand into new legal markets

Cresco's revenue growth is the result of some wise decisions For starters, investing in its home state proved fruitful. Illinois legalized recreational cannabis on Jan. 1, and recorded $40 million in legal recreational marijuana sales in that first month. In October, that figure was a record-breaking $100 million. The total from January through October is more than $500 million, and Cresco is taking advantage -- the company opened its tenth dispensary in the state in September amid this burgeoning market.

With a stable cash position and growing revenues and EBITDA, it shouldn't be hard for Cresco to expand into the states that legalized recreational marijuana in November (Arizona, Montana, New Jersey, and South Dakota). The company ended the third quarter with $58 million of cash and cash equivalents and no debt. Management also stated during the earnings call that the cash balance includes $50 million in tenant improvement allowances (money provided by a landlord to cover a tenant's construction costs). Cresco plans to use these funds to expand cultivation facilities in Michigan, Massachusetts, and Ohio without the need to raise additional capital.

Its growth this year has helped bring its stock price new heights. So far this year, Cresco's stock has gained a whopping 50%, much better than industry benchmark Horizons Marijuana Life Sciences ETF's slight decline of 0.57%. For comparison, Aurora's stock has plummeted by 60% over the same period.

CRLBF Chart

CRLBF data by YCharts

1 reason to sell Cresco Labs?

I can only find one potential downside to this exceptional pot stock: Marijuana is still not legal at a federal level in the U.S., which limits the market for companies like Cresco and makes it harder for them to raise capital. Though the legal state markets are booming, the U.S. cannabis industry won't reach its full potential until cannabis is legalized nationally. In the meantime, Cresco will need to work hard on further reducing costs to generate profits consistently.

That said, Cresco Labs is a vertically integrated cannabis company, and that control over its supply gives it an edge over peers. Cresco has proven its potential by not only surviving but thriving amidst the pandemic. Its remarkable revenue numbers, consistent positive EBITDA, and strong balance sheet make it an excellent cannabis pick for long-term returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
CRLBF
$8.20 (1.36%) $0.11
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$5.95 (2.15%) $0.13
Canopy Growth Stock Quote
Canopy Growth
CGC
$10.17 (1.80%) $0.18

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