The quarterly numbers looks strong for Cronos Group (Cronos Group Stock Quote, Chart, News, Analysts, Financials TSX:CRON), according to Raymond James analyst Rahul Sarugaser who updated clients on the cannabis company in a report on Tuesday. Sarugaser maintained his “Outperform 2” rating and target of $5/share on Cronos for a projected return of 39.7 per cent.
Founded in 2012 and headquartered in Toronto, Canadian licensed cannabis producer Cronos Group released fourth quarter 2021 financial results on Tuesday, which Sarugaser noted to be ahead of expectations.
Cronos came in with revenue of $25.8 million for the quarter, which was roughly in line with the Raymond James projection of $26.9 million and ahead of the consensus estimate of $22.8 million, while also producing 26.5 per cent sequential growth. (All figures in US dollars.)
International sales also proved pivotal for Cronos in the quarter, with Canadian sales accounting for 67 per cent of total sales to fuel the 88 per cent revenue mix, followed by sales in Israel accounting for 18 per cent of the mix, with the United States the third-biggest market at 13 per cent.
Meanwhile, other prominent financial items provided further optimism for Cronos Group, as the adjusted EBITDA loss of $27.4 million was an improvement on the $46.8 million loss from the previous quarter. In addition, the report came in well ahead of the Raymond James estimate of a $52.5 million loss, as well as the consensus projection of a $38.3 million loss.
At the end of the quarter, the company’s cash and short-term investments came in around $1 billion, slightly down from the $1.04 billion from the previous quarter, though the company does not have any debt.
“I am proud of the dedication and resilience our team has shown throughout the past year as we navigated through a dynamic market environment,” said Kurt Schmidt, President and CEO of Cronos Group in the company’s March 1 press release. “Our fourth quarter 2021 results indicate positive momentum, which we will look to carry forward as we begin to implement our strategic and operational realignment initiatives. As we look to 2022, we will continue to realign Cronos Group’s organizational structure to match our strategy, with a primary focus on adult-use products and elevating our brands through rare cannabinoids.”
According to Sarugaser, Cronos ranks seventh in the Canadian adult-use cannabis market with a 5.2 per cent overall market share, with its positioning driven by strong sales in cannabis flower and edibles, capturing 10 per cent of the market in the latter category thanks to its SOURZ and FEELZ gummy lines.
“CRON has clearly refined its approach in markets that are working today, and is revising its approach in markets that aren’t,” Sarugaser said.
Cronos Group ended the 2021 fiscal year at $74.4 million in revenue, slightly down from Sarugaser’s $76 million estimate, but still producing a year-over-year increase of 59.3 per cent. Looking ahead to 2022, Sarugaser projects Cronos Group to take a significant step forward, rocketing to a forecasted $187 million in revenue for a potential year-over-year increase of 151.2 per cent.
In terms of valuation, Sarugaser projects the company’s EV/Revenue to continue dropping from the 7.3x it initially reported in 2020 to 4.5x in 2021, then projected to drop to 1.8x in 2022.
Meanwhile, with continued investment and restructuring, Sarugaser continues to forecast negative EBITDA for Cronos, which ended the year with a $160.5 million loss, a downward shift from the $147.3 million loss reported in 2020. Looking ahead to 2022, Sarugaser projects another nine-figure adjusted EBITDA loss, setting his target at a $194 million loss.
Accordingly, Sarugaser continues to forecast a negative EV/adjusted EBITDA multiple, setting projections of (1.8)x for both 2021 and 2022.
“With its $1 billion balance sheet, we believe CRON’s realignment has a lot to do with focusing on adult-use product innovation that is working in Canada, and investing in technologies and brands that are, in essence, borderless,” Sarugaser said. “This, in our view, is what CRON means when it talks about Canada as a ‘test market’: CRON does want to win at home, and drive material revenue as the Canadian market grows, but, the company keeps its eyes on the future of its border-transcendent brands, which CRON expects will make their greatest impact in markets outside Canada.”
Despite reaching a 52-week high of $13.35/share on March 15, Cronos Group’s share price has cratered to a 66 per cent loss over the last 12 months, with a 15.1 per cent loss since the start of 2022. The company’s share price has dropped as low as $4.18/share over the same 52-week period, which occurred on January 27.