Cannabis stocks have had a rough couple of years. The sector’s benchmark fund, the Horizons Marijuana Life Sciences ETF, spent most of 2019 and early 2020 sinking, and that period was followed by one during which it largely traded sideways…
But these once-dormant investments began to heat up again in late 2020 and early 2021. And rather than the Canadian players, it’s been the U.S. pot companies that are performing especially well. Optimism about the industry’s potential and renewed hopes that Congress may act to legalize marijuana at the federal level have sent these stocks higher.
Amid all this bullishness, my eye is on one particular marijuana stock: Illinois-based Cresco Labs (OTC:CRLBF). Cresco’s outstanding third-quarter report revealed impressive growth prospects. Over the past 12 months, the pot stock has gained almost 240%, wildly outperforming the S&P 500, which is up by 30% over the same period. Let’s review Cresco’s results from last quarter, and consider what investors can expect from the company this year.
1. Cresco’s revenue growth is compelling
It’s accurate to say that, by and large, it is difficult for marijuana companies to make money. Even though conditions in 2020 favored cannabis sales, the spectacular revenue growth that occurred wasn’t enough for many of them to get out of the red. Those efforts have been further hindered by the companies’ turned attention to cost-cutting measures and difficulties gaining access to capital.
But Cresco Labs is an exception. The company has worked hard to expand its footprints in key markets. It sells cannabis products in nine U.S. states, has earned licenses for 15 production facilities and 29 retail outlets, and has already achieved high revenue growth and positive EBITDA (earnings before interest, tax, depreciation, and amortization). After November’s election, a total of 35 states and the District of Columbia allow cannabis use for medical purposes, while 15 states and D.C. have legalized recreational cannabis use. Just in the past few weeks, legislatures in Virginia and New Jersey voted to legalize the recreational use of the drug.
Being a vertically integrated multistate cannabis operator gives Cresco Labs control over its supply chain, an advantage that has been particularly valuable during the pandemic. That control over the product journey from factory to shelf ultimately prevented its revenue from taking a hit. Instead, in fact, its top-line jumped by 323% year over year in the third quarter, from $36.2 million to $153.2 million.
Cresco also saw hikes in its retail and wholesale revenue. In the third quarter, wholesale revenue contributed 59% of total revenue while retail contributed the rest. Retail revenue for the company includes both medical and recreational sales in the U.S. and nicotine vape sales from Canada. Expanded capacity in Illinois and Pennsylvania and strong growth in California drove its wholesale revenues. Meanwhile, sequential same-store sales growth (plus the contributions from two new stores in Illinois) led to the higher retail revenue.
2. A profitable marijuana company
More importantly, Cresco Labs is already profitable — a relatively rare attribute among marijuana companies. The staggering top-line gains drove another quarter of positive adjusted EBITDA, which sprung to $52 million from $11 million in the year-ago period. Lower costs — especially the dip in selling, general, and administrative (SG&A) expenses to 30% of total revenue from 70% a year prior — also contributed to its bottom-line improvements. Consistently positive EBITDA is a sign that a company handles its operating expenses well. This effort showed on the bottom line: Cresco reported a net income of $4.9 million in Q3.
Voters in Arizona, Montana, New Jersey, and South Dakota legalized recreational marijuana use in November. With Cresco’s stable cash position and its growing…
Continue reading at THE MOTLEY FOOL