Cronos Group will emerge from this crisis, Raymond James says

Raymond James analyst Rahul Sarugaser reviewed fourth quarter financials from Canadian cannabis LP Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON) in an update to clients on Tuesday, saying the ho-hum results coupled with a hitch in the company’s US business are enough to trigger a target reduction, but that the stock is still looking attractive at these prices.

After more than a month’s delay, Cronos Group released its Q4 and year end numbers on Monday showing net revenue of $7.3 million, up from $4.3 million a year ago, and a gross profit (loss) of $20.4 million, down from a loss of $22.3 million in Q4 2018.

The loss was prompted by an inventory write-down of $24.0 million, which according to the company was mostly due to poorer market prices for cannabis over 2019. Adjusted operating loss was $56.6 million.

The full year saw Cronos capture $23.8 million in net revenue, up $22.2 million for 2018, and an adjusted operating loss of $114.2 million. The company ended 2019 with cash and cash equivalents of $1.2 billion.

“Cronos Group ended 2019 with a strong foundation and balance sheet and a clear focus on achieving our core strategic initiatives to drive long-term, sustainable growth,” said CEO Mike Gorenstein in a press release. “Importantly, we expanded our Canadian distribution footprint, broadened our brand portfolio, enhanced our global supply chain capabilities and advanced our breakthrough intellectual property and research and development initiatives.”

Management provided a COVID-19 update, as well, saying the company’s global facilities currently remain operational, although steps are being taken to ensure the health and safety of employees and customers and the company may see further impacts to business as the situation evolves.

In terms of its brands, Cronos noted the launch of its vaporizer devices in the Canadian adult-use market this past December while at the same time announcing there would be a pause to distribution of its PEACE+ hemp-derived CBD tinctures in the United States through its partner company Altria Group, saying they will “continue to evaluate other product formats and categories that we believe may be more suitable for the PEACE+TM brand in the evolving environment.”

For his part, Sarugaser judged the fourth quarter results as “[not] a disaster, but they sure weren’t exciting.” On the write-downs, the analyst said the numbers weren’t that impactful, seeing as CRON has such mammoth cash reserves and a well-heeled partner in Altria.

Sarugaser did say that the suspension of PEACE+ will show up in his forecasts.

“We do not believe this will be the end of a US-based, value-consumer CBD product line that leverages the MO distribution framework, but given CRON's announcement and the current health crisis, we are pushing out the launch of Peace+ by one year. This revelation drove the most significant changes to our estimates,” Sarugaser wrote.

On Cronos’ chances during the currently volatile environment, Sarugaser was upbeat.

“We are confident CRON will emerge from this crisis strong given its partner and balance sheet, and will find itself in an environment of reduced competition, especially in Canada. Our assumption that CRON would capture 12 per cent of Canadian cannabis market share remains. But, the material change in the course of its US operations (Peace+pause), we've adjusted our estimates downward,” Sarugaser wrote.

With the update, the analyst has reaffirmed his “Outperform 2” rating for CRON but dropped his target price from $12.00 to $10.50, which at press time represented a projected one-year return of 16.7 per cent.