Cresco Labs Inc. (CL:CSE; CRLBF:OTCQX) and Columbia Care Inc. (CCHW:CSE; CCHWF:OTCMKTS), two U.S.-based cannabis sellers, decided to terminate their previously agreed upon transaction in which Cresco would acquire Columbia, reported ROTH Capital Partners analyst Scott Fortune in a July 31 research note.
"The agreed deal (March 2022) was unable to finalize primarily due to the challenging cannabis macroenvironment leading to the inability to divest necessary assets (limited investment capital in cannabis) to meet regulatory approval," Fortune explained. "Both parties recognized the difficulties and parted ways with no break-up fees or penalties."
Rating, Target Price Unchanged
ROTH reiterated its Neutral rating on Cresco Labs, given it believes the ending of the deal was already priced into the cannabis firm's shares, noted Fortune.
The financial services firm also kept its 12-month target price of US$1.75 per share on Cresco, currently trading at US$1.57 per share in comparison. The price difference reflects an 11% potential gain for investors.
Near-Term Growth Possible?
How Cresco Labs is going to garner topline growth in the near term is a concern, Fortune wrote. This is because it lacks a significant presence in any of the expanding emerging markets, such as Maryland, New Jersey, and Virginia, which recently legalized recreational cannabis use. Cresco was going to gain these markets through its acquisition of Columbia Care.
As such, ROTH expects quarter-over-quarter revenue growth for Cresco Labs to remain flat for the rest of 2023. It anticipates year-over-year topline growth this year to be about 6%.
Thus, Fortune wrote, "We remain cautious on [the company]. We look for additional color to update our financial model after Cresco's Q2/23 earnings call sometime in August."
With the merger in the rear-view mirror, Fortune wrote, Cresco Labs "can now focus on adding margin-accretive growth opportunities in existing and new emerging markets" to generate cash flow.
Management intends to do just that, continue pursuing and driving scale in higher-margin operations. Regarding its existing lower-margin operations, such as those in California and in other markets experiencing price pressure, Cresco will re-evaluate and potentially restructure those.
Also, the company will maintain its consumer packaged goods approach but likely shift toward adding retail, as it "needs increased verticality with more owned retail assets," noted Fortune.
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- Doresa Banning wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
- This article does not constitute medical advice. Officers, employees and contributors to Streetwise Reports are not licensed medical professionals. Readers should always contact their healthcare professionals for medical advice.
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Disclosures for Roth Capital Partners, Cresco Labs Inc., July 31, 2023
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures: Shares of Cresco Labs Inc. (CL.CN) may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. A Research Analyst and/or a member of the Analyst's household own(s) equity options of Cresco Labs Inc. (CL.CN).
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2023. Member: FINRA/SIPC.