Cronos Group gets a price target reduction from GMP Securities

First quarter financials from cannabis company Cronos Group (Cronos Group Stock Quote, Chart TSX, NASDAQ:CRON) did little to change GMP Securities analyst Martin Landry’s opinion of the stock.

In an update to clients Friday, Landry revised his Q2 expectations downward, kept his “Hold” recommendation and dropped his target price from $23.00 to $21.00.

Last Thursday, Toronto-based Cronos announced its first quarter ended March 31, 2019, results, with CEO Mike Gorenstein saying that the company performed in line with its expectations over the quarter.

“We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios,” said Gorenstein, in a press release. “We’re delighted to have officially closed our transaction with Altria and to kick off a relationship we expect to lead to significant growth and value creation. Altria’s investment and the services that Altria will provide to Cronos Group will enhance our financial resources and allow us to expand our product development and commercialization capabilities.”

For its Q1, Cronos generated revenue of $6.5 million, a 15-per-cent improvement on the previous quarter and in-line with Landry’s forecast at $6.5 million and the consensus opinion of $6.4 million. Its Adjusted EBITDA loss of $8.9 million was better than Landry’s negative $10 million estimate but lower than the Street’s negative $7.4 million.

The company reported 1,111 kg of volume sold and an average selling price of $5.73, which compared to Landry’s estimates of 1,107 kg and $5.90 per gram, with the analyst noting that the company has not yet fully resolved the bottlenecks in processing and packaging which resulted in finished good inventory of 381 kg as of March 31, for the most part unchanged from the previous quarter.

“Cronos is testing investor patience with a slow production ramp-up and bottlenecks for processing and packaging. We believe these issues will be resolved before the summer which should result in a stronger back half for the company. While Cronos’ shares have declined significantly from their 52-week high, we see limited near-term catalysts and investors should await a better entry point,” says Landry.

Landry notes that management has guided for minimal revenue growth over Q2, with the analyst decreasing his 2019 sales forecast to reflect the slower ramp-up in grams sold. The company posted a better than expected gross margin of 54 per cent for the quarter but Landry is still calling for a deeper EBITDA loss due to the lower sales volume projections. The analyst thinks CRON will generate 2019 revenue and EBITDA of $62.1 million and negative $25.4 million, respectively. His $21.00 target represented a projected return of 10.2 per cent at the time of publication.