Stay away from Cronos Group right now, GMP Securities says

Recent quarterly results from cannabis company Cronos Group (Cronos Group Stock Quote, Chart TSX:CRON) have given no reason for GMP Securities analyst Martin Landry to change his opinion of the stock, which he continues to rate a “Hold” in an equity research update on Wednesday.

Cronos reported its fourth quarter financials yesterday, with results falling below expectations. Revenues came in at $5.6 million, up 49 per cent from the previous quarter but below the consensus estimate of $10.4 million and below Landry’s $8.8 million forecast. On Adjusted EBITDA, Cronos’ Q4 generated a loss of $7.9 million, lower than the consensus of negative $2.1 million and Landry’s negative $0.4 million.

Landry says that the company has a lower inventory position as of December 31 of last year than it did on September 30, 2018, which could make it difficult for the company to increase its sales volumes sequentially in Q1/19 and, as a result, Landry has lowered his revenue estimates for quarters one and two. The analyst also spied a bottleneck in the company’s packaging and processing, which he thinks could be in some ways alleviated through partner Altria’s know-how in packaging technology.

Cronos’ shares dropped just one per cent on Tuesday, which Landry see as somewhat mystifying.

“Given the [quarterly results], we are left wondering why investors hang on. In our view, investors expect CRON to enter into the US market for hemp-derived CBD products. The Altria partnership not only gives Cronos potential access to significant distribution infrastructure in the country, but it also bolsters its existing relationships with potential sourcing partners and/or product manufacturers. However, one can make a strong case that such a scenario appears already priced into the stock given Cronos’ valuation at 35x 2020 sales, 3x higher than peers,” Landry says.

Landry advises investors to wait for a better entry point and has lowered his 12-month target price from $24.00 to $23.00, which represents a projected return of negative 15 per cent at the time of publication.