Now’s not the time to buy Cronos Group, PI Financial says

Mixed results in its quarterly earnings has PI Financial analyst Jason Zandberg holding steady with his “Neutral” rating on Cronos Group (Cronos Group Stock Quote, Chart TSX:CRON) with the lowered target price of $22.00 (previously $24.00).

Cannabis licensed producer Cronos posted its first quarter fiscal 2019 results on Thursday, with the company highlighting the closing over the quarter of the $2.4-billion investment in Cronos from tobacco giant Altria Group.

“In the first quarter of 2019, the business performed in line with our expectations. We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios,” said Mike Gorenstein, CEO of Cronos Group, 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.

Cronos finished its Q1 with net revenue after excise taxes of $6.5 million, up 120 per cent year-over-year and 15 per cent from last quarter. The company took an EBITDA loss of $8.9 million versus a loss of $1.6 million a year ago. Revenue and EBITDA were lower than Zandberg’s forecasted numbers of $7.7 million and negative $5.2 million, respectively.

The analyst describes the impact of the quarter as mixed.

“The revenue total was underwhelming but we believe Cronos is setting up for a strong launch of concentrates – more specifically vape pens. Altria has significant expertise in the vaping industry through its investment in JUUL and we expect this will translate into success in the Canadian rec market when vape pens are allowed. We have modelled the launch of vape pens in Canada to be October 2019,” wrote Zandberg in a client update Thursday.

Zandberg has updated his forecasts, now calling for fiscal 2019 revenue and EBITDA of $48.0 million and negative $17.8 million (previously $91.5 million and negative $57.5 million). His $22.00 target represents an EV/EBITDA of 86x his fiscal 2021 estimates and translates to a projected 12-month return of 14.8 per cent at the time of publication.