With a marked drop in share price over the past few months, PI Financial’s Jason Zandberg says it’s time for a rating upgrade on cannabis name Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON). In an earnings update to clients last Thursday the analyst raised CRON from “Neutral” to “Buy” while maintaining his target price of $22.00, representing a projected 12-month return of 19.2 per cent at the time of publication.
Toronto-based Cronos o August 8 announced financial results for its second quarter ended June 30, 2019, featuring net revenue of $10.2 million, a 202-per-cent improvement on 2018’s Q2 and a 58-per-cent increase over Q1/2019. The company posted an EBITDA loss of $17.8 million versus positive $1.1 million last year and negative $8.9 million last quarter. EPS was $0.22, related to a $263.9-million gain on revaluation of derivative liabilities. (All figures in Canadian dollars unless otherwise noted.)
In the press release, CEO Mike Gorenstein emphasized Cronos’ steps to enter the US market during the second quarter through the acquisition of Redwood Holding’s hemp-based CBD platform, along with the company’s expanded R&D capabilities and the opening of Cronos Device Labs in Israel.
“As we look ahead, we will continue to capitalize on this momentum by building on our partnerships with Altria and Gingko Bioworks and leveraging our collective resources and expertise to realize the significant potential in the growing cannabis industry,” wrote Gorenstein.
Zandberg pointed out that the growth in net revenue was primarily due to increased sales of CBD oil and dried flower (notably from production increases at Peace Naturals), with total kilos sold of cannabis up 43 per cent to 1,584 kg over the previous quarter. Pricing increased from $5.73 per gram in Q1 to $6.44 per gram in Q2.
Cronos Group: stock has a competitive advantage because of balance sheet, analyst says
The analyst also pointed to CRON’s strong cash position which stands at $2.323 billion at the end of the second quarter (down from $2.418 the quarter before), calling it a “significant competitive advantage.”
“We believe the upside for CRON’s revenue forecast is its success with its upcoming vape launch in Canada and its CBD sales in the US. We believe Altria’s expertise and consumer insights in vaping are substantial and the Lord Jones recent entry into 170 Sephora stores will yield strong sales,” Zandberg says.
The analyst has raised his top line forecasts while dropping his EBITDA estimates, calling for fiscal 2019 and fiscal 2020 revenue of $51.4 million and $204.6 million, respectively (previously $48.1 million and $172.5 million, respectively) and fiscal 2019 and fiscal 2020 EBITDA of negative $63.7 million and $7.0 million, respectively (previously negative $17.8 million and $21.4 million, respectively).
Earlier this month, Cronos pushed forward on its US expansion plans with the purchase of Redwood Holding Group, the company behind CBD beauty brand Lord Jones for US$300 million, $225 million of which will be in cash and the rest in newly issued CRON shares. The deal is expected to close in the third quarter of this year.
Cronos’ share price rocketed up the charts earlier this year, more than doubling in value between January and early March. Since then, the stock has participated in the sector-wide downturn, going from $30.00 to where it now trades in the $17.00 range.
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