Raymond James downgrades Cronos Group

Raymond James analyst Rahul Sarugaser has reevaluated his stance on Canadian cannabis name Cronos Group (Cronos Group Stock Quote, Chart, News NASDAQ:CRON) and concluded that the company represents one of the rare defensive-minded plays in the ever-volatile cannabis space.

In an update to clients on April 26, Sarugaser dropped his rating from “Outperform 2” to “Market Perform 3” while cutting his target price from $10.50 to $6.50.

Cronos, a vertically-integrated cannabis company with production and distribution on five continents and a partnership with tobacco giant Altria, has seen its share price plummet over the past 12 months along with the rest of the cannabis space.

CRON left a high of $25 per share in February 2019 and has declined fairly steadily over ensuing months to where it now trades around $6.00. (All figures in US dollars except where noted otherwise.)

The company, which will hold its 2020 first quarter earnings release next week on May 8, delayed the release of its Q4 until March 30, when it reported revenue of $7.3 million, up from $4.3 million a year earlier, and a gross profit loss of $20.4 million compared to a loss of $22.3 million a year earlier. Management had attributed the larger loss to an inventory write-down of $24.0 million due to poorer market prices for cannabis over 2019.

Along with the numbers, Cronos announced the launch of vaporizer devices into the Canadian Cannabis 2.0 market in December 2019 but also said that its Peace+ hemp-derived CBD products slated for release into the United States through Altria would be put on hold.

It’s that pause on US developments that was a cause for concern from Sarugaser in his latest report, where the analyst a lot of upside contribution from Peace+ through Altria’s network of up to 250,000 convenience stores.

“In light of intense current market uncertainty and management shifts within Altria —adding complexity, potentially, to decisions relating to CRON's use of Altria's distribution network — we’ve decided to sharpen our pencils on this and have removed potential Peace+ revenues from our estimates entirely,” Sarugaser wrote.

“Now, we drive our revenue estimates purely on CRON's ability to generate sales in: i) Canada's adult-use and medical markets; and ii) the U.S. from its ultra-premium, CBD-only Lord Jones brand,” he said.

In his updated forecast, Sarugaser is calling for 2020 revenue of $72 million, up from $50 million, and an EBITDA loss of $93 million, down from a loss of $2 million.

Sarugaser argued that with $1.5 billion on its balance sheet, Cronos is in rare company in the cannabis field, with only Canopy Growth in the same league at C$2.3 billion and Aphria below them at C$515.1 million, giving the name a modicum of safety in the cannabis space.

“While we are revising our revenue estimates, target price, and recommendation downward, for now, we fully appreciate that—based on the strength of its balance sheet—CRON remains a relatively safe, and hence, rare defensive play in the Canadian cannabis sector,” Sarugaser said.

“Further, once CRON has reset its US strategy and begins to announce—likely in 2021—the relaunch of its Peace+ brand, among other initiatives we suspect are in the works, we would be motivated to augment the $6.50 baseline target price we've established today,” he wrote.

At press time, Sarugaser’s target price of $6.50 represented a projected 12-month return of five per cent.