Cronos Group is overvalued, Canaccord Genuity says

Canadian cannabis producer Cronos Group (Cronos Group Stock Quote, Chart, News: TSXV:CRON, NASDAQ:CRON) may be progressing well on its expansion plans ahead of this summer’s rec cannabis legalization, but the company’s share price is too high, says Canaccord Genuity analyst Matt Bottomley, who in a report to clients on Monday downgraded his recommendation from “Hold” to “Sell” with a target price of $6.50.

Cronos Group posted its fourth quarter and fiscal year ended December 31, 2017, financials on Monday, showing sales in 2017 of $4.1 million, a 636 per cent jump from 2016. The company marked a number of milestones including new construction at its Peace Naturals facility and a 50/50 joint venture with US cannabis company MedMen Enterprises.

“We are building Cronos Group with a focus on the long-term and 2017 set the foundation for the explosive growth we have already started realizing in 2018,” said Mike Gorenstein,” CEO of Cronos Group, in a press release. “We are extremely proud of all that our team has accomplished and look forward to a year of rapid increases in sales, commencing distribution in new markets, further developing disruptive intellectual property and launching new iconic brands.”

Bottomley notes that Cronos’ Q4/17 revenue of $1.6 million was below his forecast of $3.1 million, as was its Adj. EBITDA loss of negative $3.8 million (compared to his estimate of $0.3 million. Production costs for the quarter were also higher than estimated, coming in at $3.0 million, compared to the analyst’s $0.9 million.

Yet, coming behind on earnings estimates is relatively immaterial at this pre-recreational cannabis stage, says Bottomley.

“We believe Cronos will still be a meaningful player in the space and has implemented a differentiated strategy versus many of its peers, including various strategic initiatives and international expansion plans,” he says. “However, at current trading levels, we would not be buyers of CRON and we would look for lower buying opportunities in the future.”

“Although we believe a premium valuation to the peer average is justified, Cronos also trades above the top four Canadian Licensed Producers by market cap (with greater invested capital, production capacity, and international reach) at 18.1x and is in line with the largest player in the space (Canopy Growth Corp: TSX: C$30.11 | HOLD, C$26.50 TP), which trades at 23.9x,” he says.

Bottomley’s target price of $6.50 represents a 12-month return on investment of negative 25.9 per cent at the time of publication.