Cresco Labs (CRLBF 8.11%), a Chicago-based cannabis multi-state operator (MSO), announced in March that it was acquiring Columbia Care (CCHWF -1.88%), a similar cannabis MSO, in an estimated $2 billion deal that is expected to close by the end of this year. After gobbling up Columbia Care, here's why Cresco Labs may become the farthest-reaching, most profitable cannabis company in the U.S.

Separate signs of a promising future together

Taken together, both companies' recently announced Q2 results could foretell what the new Cresco Labs earnings look like come the New year

Cresco posted total sales of $218 million in Q2 2022, up 4% year over year. Its gross revenue was $112 million, up 5.1% sequentially and 11.7% year over year.

Much of that growth throughout the quarter owes to Cresco:

  • Remaining the No. 1 wholesaler of branded cannabis goods in the U.S.
  • Taking the top sales spot in Massachusetts
  • Holding on to the top spot in adult-use Illinois and medical-only Pennsylvania.

These market positions drove $123 million in retail sales, an average of $2.5 million per open store in the quarter. That's a good showing as market pressures tighten consumer spending and increase business costs.

Meanwhile, Columbia Care sold $130 million in goods in its second quarter, up 5% sequentially and 18% year over year. Its gross profit of $50.8 million increased 17% year over year. The company grew sales in 16 of its 17 markets, offering promising signs that Cresco will benefit financially from the merger. But Columbia Care's 131 locations (99 dispensaries and 32 cultivation and processing facilities, located in some of the largest existing adult-use states in the country, may provide the greatest opportunity to transform Cresco into even a larger revenue powerhouse than it is already.

Cresco's footprint will expand greatly after the merger

Cannabis is a unique commodity: legal medically in 38 states, plus D.C., and for adults over 21 in only 19 states, plus D.C. Since where and to whom it can be sold varies by state, where companies put their chips down on the U.S. map can be one of the most important decisions a cannabis company can make. Cresco looks to have placed its bets in just the right places at just the right time. 

Combining Cresco and Columbia Care will expand and strengthen the parent companies' reach into states with existing adult-use cannabis markets, including California, Colorado, New York, New Jersey, Illinois, and Virginia. All six already have adult-use laws on the books, making them fertile ground for expansion right now. Cresco and Columbia's combo will also solidify its position in medical-only states like Pennsylvania, Ohio, Maryland, and Florida, who will all go adult-use, just it could be a couple years out.

Ultimately, management says that after the merger, the company will have access to 55% of cannabis consumers in the United States. That geographic reach is a footprint rivaled by few other MSO's. Throw in Cresco's rising revenues over the past year, combined with Columbia's' top line growth, and the new company's earning potential will be a second indicator few cannabis MSO's can touch.

A lot can change between now and the end of the year, but Cresco's plan to acquire Columbia Care will lumber forward in Q3 and Q4. Despite regulatory delays in some states like Ohio and Pennsylvania, the new company has major potential for growth as the new, improved Cresco Labs stretches across the U.S., in some of the nation's -- and the world's -- largest adult-use cannabis markets.

Cresco's falling cash hoard, which plunged from $223.5 million at the end of 2021 to $89.5 million in the most recent quarter, could be a metric to watch. Operating cash flow has turned positive for the company, but growing capital expenditures mean it keeps burning through its cash in the bank. Unless Cresco and Columbia can collectively start bringing in more cash than they spend, their combined company will have to borrow more or sell more shares to raise funds. Even so, this could be a stock to buy for cannabis stock investors looking to get on board before the company merges and starts bringing in higher revenues.