It is hard to put your faith and money in stocks from industries that aren't profitable yet. Marijuana is one such industry that is still in its nascent stage. With inflation fears gripping the market now, investors are more skeptical of marijuana stocks. But that doesn't make them bad investments. U.S. marijuana stocks can offer excellent long-term prospects.
One such company is Illinois-based multistate operator (MSO) Cresco Labs (CRLBF -5.34%). The company doesn't operate a large number of dispensaries nationwide but has some smart strategies up its sleeve that could take it to great heights in the long run. Let's dig in.
Image source: Getty Images.
A new merger leads to a new cannabis leader
Mergers and acquisitions (M&A) are pretty common in the cannabis industry. Many U.S. and Canadian cannabis companies have consolidated in the last few years. With the boom in the U.S. state cannabis markets, many MSOs are expanding aggressively and minimizing competition through M&A.
The merger news that shook up the industry this year was Cresco Labs acquiring New York-based peer MSO Columbia Care (CCHWF -1.70%). The deal is estimated at an enterprise value of $2 billion and could close by the fourth quarter of this year. Upon regulatory approvals, Cresco will acquire all the issued and outstanding shares of Columbia Care. Cresco operates just 50 stores nationally now. But with Columbia's assets in its portfolio, it will own more than 130 dispensaries in 18 states.
A force to be reckoned with
Cresco already plays it smart by targeting limited license markets. Since cannabis is illegal federally, state regulators are selective of the number of licenses they issue and to whom. By targeting these markets, Cresco has garnered a loyal customer base that keeps boosting its financials. Its recent first-quarter results are proof of that.
The first quarter's revenue surged 20% to $214 million from the prior-year quarter. Cresco also has been consistently profitable from an operational standpoint. Its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) jumped 45% year over year to $51 million. It ended the quarter with $179 million of cash on hand which should help fuel its expansion plans this year.
Meanwhile, Columbia Care's revenue jumped 43% year over year to $123 million in Q1, with a jump in adjusted EBITDA from $3.7 million in the year-ago quarter to $17 million in Q1.
Even before this deal, I favored both marijuana companies as excellent buys that could make investors rich over the long haul. Now combined with Columbia, Cresco could be a much bigger, stronger, and more profitable company. With the marijuana industry expanding, many smaller companies have entered the market.
It was smart of Cresco to buy another growing MSO and minimize the competition now that valuations are low. I believe this is a great deal for Cresco that will allow it to establish a more dominant U.S. presence as the market expands.
CRLBF PS Ratio data by YCharts.
It will also help it give a tough fight to its peers Trulieve Cannabis and Curaleaf Holdings, which boast more than $1 billion in revenue over the trailing 12 months. Trulieve is already growing stronger after acquiring Arizona-based Harvest Health last year, which helped it establish a foothold in Arizona, Pennsylvania, and Maryland. Trulieve now operates 165 dispensaries while Curaleaf holds 128 retail stores nationwide.
Should you buy this pot stock now?
Estimates show the U.S. cannabis industry could grow at a compound annual growth rate (CAGR) of 14% to be worth more than $70 million by 2030. Cresco's management believes this deal could push them to achieve "70% of the addressable cannabis market" by 2025.
What's more, any positive movements toward cannabis reforms will make pot stocks peak again. Growth stocks usually take time to price in the company's financials. All investors need now is patience to let this acquisition come to fruition. Average Street analysts have a "buy" rating for Cresco's stock. Cresco's stock is trading close to its 52-week low, making it the right time to buy it at this bargain price.