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Why It's a Big Deal for Cresco Labs to Report GAAP Financial Results

Cresco Labs (OTC: CRLBF) posted strong sales growth in its first-quarter results announced in late May. This growth wasn't the only notable thing about the company's Q1 update, though. Cresco also reported its results using U.S. generally accepted accounting principles (GAAP) for the first time.

In this Motley Fool Live video recorded on June 11, healthcare and cannabis bureau editor and analyst Olivia Zitkus and Motley Fool contributor Keith Speights discuss why it's a big deal for Cresco to switch to reporting its results using GAAP standards.

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Olivia Zitkus: Well then, let's go there. Let's go to the states and talk a little bit about Cresco Labs if we could. Cresco Labs reported its Q1 earnings on May 27, and that was the first time it reported earnings under generally accepted accounting principles.

You alluded to this when we were just talking about Canopy Growth. Can you explain again to us why is that important especially for pot companies? Why is that a big deal?

Keith Speights: Well, the main thing Olivia, is that companies that report GAAP results, they are focused on the U.S. market. They're focused on U.S. investors, and that's what you want to see. You want to see them focusing on U.S. investors. By switching to reporting to GAAP, that is clear that Cresco Labs is appealing to U.S. investors.

Now the problem for the company right now, is that it can only list its shares over the counter in the U.S. That gets us back to federal cannabis reform. Maybe something will happen that will clear the way for Cresco Labs to list its shares on the Nasdaq or maybe even the New York Stock Exchange.

But I like that Cresco is reporting GAAP. I think that provides some confidence that what the company is reporting is believable and trustworthy, and their results look really great. The company continues to grow and it's one of the U.S. stocks that I really like right now.

Zitkus: Awesome. Yeah. They beat the revenue consensus by $8 million. They brought in $178.4 million in Q1. That was 169% growth year over year, which is pretty impressive compared to what we're seeing north of the border. [laughs]

Speights: Yeah. Cresco is a company that I think has made some really smart acquisitions. Early last year, they closed their deal buying Origin House, which is a big wholesaler and big in the California market particularly. They just closed the deal -- I can't remember off the top of my head -- but getting into the Florida medical cannabis market. I think Cresco has been pretty smart at the deals they're making right now.

Zitkus: Yeah, totally. The California move is huge. That's the largest market in the country. I don't want to go so far as to say in the world, but [laughs] I do remember seeing that it's definitely the largest in the U.S., right?

Speights: It is. The other thing about Cresco is that you can't really use earnings-based valuation metrics with many cannabis companies [laughs] because they're not profitable, at least not on a GAAP basis. But if you look at price-to-sales ratio, Cresco Labs is one of the most attractively valued cannabis stocks out there right now.

I think it's in the bottom two, it's in the top two, I guess, depending on which way you're looking at it. But their valuation is one of the most attractive that you're going to find, and their growth prospects are excellent. I think for investors who are looking to buy a cannabis company, look to the U.S. more so than Canada, in my view anyway, and if you're looking in the U.S., Cresco is one of the top ones.

Zitkus: Yeah, totally. I just pulled up those numbers. Cresco Labs is currently trading for 4.2 times sales, whereas some of the other ones we've talked about, HEXO is trading at 8.3 and Canopy's trading at 23. That's not insignificant, those differences.

Speights: Yeah, 4.2 times sales isn't bad in most industries.

Zitkus: Yeah, totally.

Keith Speights has no position in any of the stocks mentioned. Olivia Zitkus has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc. The Motley Fool recommends HEXO Corp. and Nasdaq. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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