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Better Buy: Cresco Labs or Trulieve?

By Alex Carchidi and Jim Halley - Nov 25, 2021 at 7:57AM

Key Points

  • Cresco Labs keeps costs low by wholesaling marijuana where it's profitable to do so.
  • Trulieve is a market leader in both Florida and Arizona.
  • Neither company needs marijuana legalization to keep delivering big gains for shareholders.

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These two operators are expanding nationally while selling plenty of cannabis at home.

4rijuana companies Cresco Labs ( CRLBF 1.75% ) and Trulieve Cannabis ( TCNNF -0.32% ) each have a good chance to deliver for their shareholders. Both are growing rapidly, and both have substantial shares in some of the United States' most dynamic state markets. Whereas Cresco's market cap is only $2.4 billion, Trulieve's is larger, at around $5.5 billion.

But is one of these stocks a better investment than the other? Let's examine an investment thesis for each to find out.

A cannabis farmer holds one of their crops while standing in a field and reading from a tablet.

Image source: Getty Images.

The case for Cresco Labs

Alex Carchidi (Cresco Labs): In my view, Cresco Labs is a good choice for investors who are looking for a cannabis company that's making progress in multiple areas at once.

Right now, Cresco is active in the majority of the largest cannabis markets in the U.S., including California, New York, Pennsylvania, and Massachusetts, and it's already planning to penetrate these markets more deeply. Because some of these states like California already have recreational cannabis legislation, it doesn't need to wait for cannabis legalization to occur to see a growing level of demand. 

And, as the company makes around half of its revenue from wholesale operations to other businesses, it doesn't necessarily need to maintain a large retail footprint to rake in cash. That also makes it a bit easier to expand. But it also has a successful retail model, which is steadily bringing in more and more annual sales per store with every year. The flexibility to choose between prioritizing wholesale or retail in a given market is one of Cresco's biggest boons, as it means the company doesn't need to compete against entrenched competitors in the modality where they may be the strongest. 

While Cresco isn't yet profitable, its quarterly revenue is increasing at a fast pace, and in the third quarter it reported a rise of 42.8% year over year. Over the last three years, its total expenses as a percentage of its quarterly revenue have fallen by 51.33%, while its quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) have skyrocketed by more than 576%.

So, if things continue to improve, investors can likely expect the company to start consistently registering earnings rather than losses over the next few quarters, and that'll be great for investors.

The case for Trulieve

Jim Halley (Trulieve): Trulieve is one of the best companies to invest in the cannabis space because the multi-state operator (MSO) knows how to make a profit and it's about to take advantage of its newfound size -- and resulting economies of scale.

Like much of the industry, the company's shares are down this year, more than 8% year to date. However, the company's financials remain strong.

Trulieve just turned in its 15th consecutive profitable quarter with revenue of $224.1 million, up 64% year over year, and net income of $18.6 million, up 7% over the same period in 2020. That takes into account the $16.4 million of one-time compensation and transaction costs connected to its purchase of Harvest Health and Recreation, which it completed on Oct. 1.

Trulieve is the third-largest pure-play cannabis stock in terms of revenue, but it is on its way to being the biggest. If you combine Trulieve's revenue with Harvest Health's in the quarter, the company would have reported $316 million in revenue, just $1 million behind Curaleaf, and its adjusted EBITDA would have been $121 million, No. 1 among pure-play cannabis companies. With the addition of Harvest Health, Trulieve will have 155 retail outlets and operate in 11 states, giving it the most retail locations of any MSO. Trulieve was already the biggest cannabis company in Florida, but the Harvest deal makes it the market leader in Arizona, with 16 dispensaries there and plans for 20, and in Pennsylvania, where it has 19 dispensaries. It also just opened the first two medical dispensaries in West Virginia.

The key for Trulieve will be growing while maintaining its profitability as it incorporates Harvest's business into its own while keeping to its blueprint of dominating one state at a time. It is already making headway in that regard, by retiring $270.1 million of Harvest's debt.

In Florida, the company is already the leading player and will greatly benefit whenever that state allows adult-use sales. Arizona just launched adult-use sales this year, so revenue there is climbing and Pennsylvania will be one of the largest markets in the nation whenever it opens up for adult-use sales.

Which stock is worth your investment?

At the moment, Trulieve is probably a better purchase than Cresco Labs on account of its slightly faster revenue growth and its significantly higher profit margin. Thanks to its exceptionally strong position in Florida, Trulieve's stock is likely to continue flourishing over the next couple of years.

But Cresco's situation is strengthening by the quarter, so it's still a favorable choice for investment. Alternatively, if Trulieve's plans to build new regional hubs results in its margin taking a hit, the balance could shift in Cresco's favor for a time. Overall, both of these cannabis companies are quite strong, and shareholders have a lot to look forward to in the future.

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.
$7.89 (1.75%) $0.14
Trulieve Cannabis Stock Quote
Trulieve Cannabis
$24.79 (-0.32%) $0.08
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
$8.78 (-1.90%) $0.17

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