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Cresco Labs or Curaleaf: Which Stock is the Better Cannabis Play?

Several US cannabis stocks had a good run last month as Joe Biden's presidential victory fueled hopes of additional states legalizing cannabis and legislative reforms at the federal level. Also, in November, four more states—New Jersey, Arizona, South Dakota, and Montana, legalized marijuana for recreational purposes. With this, cannabis is now approved for recreational use in 15 US states and Washington, D.C., while it is legalized for medicinal use in 35 states plus Washington, D.C.    

Bearing in mind the growing support for marijuana legalization, we will use the TipRanks Stock Comparison tool to place two prominent US marijuana companies, Cresco Labs and Curaleaf Holdings, alongside each other and select the more compelling stock.


Cresco Labs (CRLBF)

First up we have Illinois-based Cresco Labs. The multi-state operator (MSO) has a smaller footprint than larger rivals like Curaleaf, but claims to be the largest wholesaler of branded products. The acquisition of Origin House earlier this year accelerated Cresco’s entry into California, the largest legal cannabis market.

Furthermore, the legalization of recreational cannabis in home state Illinois in January this year has strengthened the company’s prospects. As per Cresco, Illinois has crossed the $100 million a month sales mark and currently has an annual run-rate of over $1.2 billion. The company has been rapidly expanding its cultivation facilities in Illinois and Pennsylvania.

Cresco is also building its retail presence by opening additional Sunnyside brand dispensaries. It recently won state approval for opening its tenth dispensary in the lucrative Illinois market. As of 3Q, Cresco operated 19 dispensaries in nine states and plans to open Sunnyside stores in Pennsylvania, Massachusetts and Ohio in 2021.

Meanwhile, Cresco delivered blowout 3Q results, with positive net income backed by a 323% year-over-year increase in revenue to $153.3 million. Adjusted EBITDA exploded to $46.4 million compared to $3.1 million in 3Q19.

The results prompted Echelon Capital Markets analyst Andrew Semple to increase his price target for Cresco (for shares listed on the Canadian Exchange) to C$14.50 from C$10.50. Semple noted, “This is the third consecutive quarter with sequential growth exceeding 40 per cent, and we note that growth accelerated in the third quarter. The principal contributors continue to be the core markets of Illinois, Pennsylvania, and California.”

Semple believes that Cresco’s developing markets (Massachusetts, Ohio, Michigan and Arizona) also have a bright outlook as new production comes online. He also sees progress towards adult-use legalization in markets such as Pennsylvania and New York in 2021.

Explaining his bull thesis, Semple concluded, “For a vertically integrated business that offers high-margin consumer staples/medical products, with non-cyclical demand characteristics and a long runway for growth, we continue to see ample room for upside to this multiple and our valuation parameters.”

Overall, 5 Buys and 1 Hold rating add up to a Strong Buy analyst consensus on Cresco. The $14.51 average price target reflects an attractive 42.3% upside potential from current levels. Shares have already advanced 48.7% so far this year.


Curaleaf Holdings (CURLF)

Leading MSO Curaleaf has rapidly expanded its retail and wholesale businesses through organic growth and strategic acquisitions, and is now present in 23 states, with 96 dispensaries, 23 cultivation sites and over 30 processing facilities.

The addition of six new states due to the Grassroots acquisition (including key growth markets like Illinois and Pennsylvania), organic growth, the impact of other acquisitions like Select brand and BlueKudu and new store openings helped drive a 195% year-over-year spike in Curaleaf’s 3Q revenue to $182.4 million and a 305% jump in adjusted EBITDA to $42.3 million. However, the company still posted a net loss of $0.01.   

Following the 3Q results, Needham analyst Matt McGinley raised the price target on Curaleaf to $14 from $13.50 and reiterated a Buy rating. The 5-star analyst pointed out that the quarter was “messy” – revenue and adjusted EBITDA increased but gross margin and cash balances declined. However, he expects the metrics that moved in the wrong direction to improve in 4Q, with substantial improvement into 2021.

McGinley added, “Into '21, we look for operational capacity in high growth markets to result in better revenue growth than peers, and with a balance sheet that could fund capex at 2-3x the '20 rate, we find the setup for growth in '22 and beyond quite strong.”

“At an EV/EBITDA multiple of 21.3x our ’21 estimate, we believe Curaleaf is still undervalued for a company with such strong growth prospects,” summarized McGinley.   

Indeed, Curaleaf is well-positioned compared to its peers to take advantage of the recent legalization of adult-use cannabis in Arizona and New Jersey, as well as the potential legalization in New York, Pennsylvania and Connecticut due to its strong presence in these states owing to its medical cannabis operations.

Curaleaf aims to double its cultivation capacity in the states of Arizona, Florida, Illinois, Maryland, Massachusetts, New Jersey and Pennsylvania, where demand continues to “substantially exceed available supply.” Plus, the expansion of the Select brand into new and existing markets and the roll-out of additional dispensaries are among Curaleaf’s key priorities.  

Shares have surged 79.1% year-to-date and with a strong outlook in place, the Street sees upside potential of 30.8% in the months ahead, with the average price target of $14.78. Curaleaf scores a Strong Buy analyst consensus with 7 Buys against just 1 Hold rating.


Conclusion

Curaleaf and its smaller rival Cresco appear to be at the top of their game and are expanding rapidly to make the best of the growing demand for cannabis. The Street’s bullish opinion about the two companies suggests that both will add value to investors’ portfolios. That said, Cresco’s higher upside potential currently gives it a bit of an edge over Curaleaf.