Expanding Production In Illinois, Pennsylvania And Kentucky Will Meet Demand

Key Takeaways

• Expansion in Illinois and Pennsylvania and entry into Kentucky's market aim to boost revenue growth and market share.
  
• Focus on operational efficiency and high ROI investments is set to enhance profitability and earnings stability.
  
• Persistent price compression, supply constraints, and regulatory challenges could impact Cresco Labs' revenue growth, margins, and long-term market strategy.

Catalysts

Cresco Labs Inc., together with its subsidiaries, cultivates, manufactures, and sells retail and medical cannabis products in the United States.

• Cresco Labs plans to expand its production capacity in Illinois and Pennsylvania to address supply constraints, which could drive revenue growth by increasing its ability to meet higher demand caused by price compression.
  
• The strategic addition of Kentucky's medical cannabis market, where Cresco holds a significant cultivation license, is expected to provide long-term revenue growth and enhance market share with its favorable regulatory environment.
  
• Cresco Labs' focus on increasing operational efficiency and prioritizing cash generation has led to improved EBITDA and operating cash flow, positioning the company for stronger earnings stability and growth.
  
• Expansion into new and existing markets like Pennsylvania and Florida, along with a focus on high ROI investments, is expected to optimize capital deployment and sustain long-term profitability and revenue growth.
  
• Improvements and successful strategies in retail operations, evidenced by the productivity outperformance of its dispensaries, are expected to support revenue growth and maintain strong margins in competitive markets.

Cresco Labs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cresco Labs's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts are not forecasting that Cresco Labs will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Cresco Labs's profit margin will increase from -10.4% to the average CA Pharmaceuticals industry of 0.7% in 3 years.
• If Cresco Labs's profit margin were to converge on the industry average, you could expect earnings to reach $4.7 million (and earnings per share of $0.01) by about April 2028, up from $-74.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 235.1x on those 2028 earnings, up from -2.9x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Cresco Labs Future Earnings Per Share Growth

Risks

• The cannabis industry is facing persistent price compression, which could continue to impact Cresco Labs' revenue and profit margins.
  
• Supply constraints have limited Cresco Labs' ability to capitalize on increased demand, potentially affecting near-term revenue growth.
  
• Emphasizing a strategic expansion approach, Cresco Labs may face risks inherent in new markets, which could impact their long-term revenue and earnings if these markets do not develop as expected.
  
• There is a continued need to carefully manage accounts receivable risk from wholesale customers, which could affect cash flows and earnings if mismanaged.
  
• Ongoing challenges in the regulatory environment, including uncertainty in markets like New York and the need for federal reform, could adversely affect Cresco Labs' growth opportunities and revenues.

Valuation

• The analysts have a consensus price target of CA$2.63 for Cresco Labs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$3.23, and the most bearish reporting a price target of just CA$1.74.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $706.7 million, earnings will come to $4.7 million, and it would be trading on a PE ratio of 235.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of CA$0.86, the analyst price target of CA$2.63 is 67.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.