Mar 27, 2019
Cronos slumps as analysts downgrade pot firm after disappointing results
Shares of Canadian cannabis producer Cronos Group Inc. (CRON.TO) are headed for their biggest one-day decline this year amid a number of negative analyst reports highlighting the company’s disappointing fourth-quarter results.
Cronos reported revenue of $5.6 million, below analyst expectations of $10.8 million, and also posted a net loss of $11.6 million for the three-month period ended Dec. 31. Mike Gorenstein, the company’s chief executive officer, told BNN Bloomberg on Tuesday that the company’s lower-than-expected revenue figures aren’t much of a concern right now. Instead, Gorenstein said Cronos is focused on a long-term strategy that includes launching a series of consumer products tied to its investment from tobacco giant Altria Group Inc., as well as developing ways to lower the cost of cannabis production.
But with analysts holding more of a short-term perspective on stocks, Cronos’ results led several analysts to either downgrade their ratings or lower their price targets, highlighting the company’s soft revenue figures and valuation which has grown more than 70 per cent since the beginning of the year.
Canaccord Genuity analyst Matt Bottomley changed his “hold” rating on Cronos shares to “sell,” while lowering his estimates for fiscal 2019 revenue to $113.7 million from $177.6 million.
“As we believe Cronos' valuation was somewhat stretched at Altria’s investment price of $16.25, we are lowering our recommendation primarily on valuation,” Bottomley said in a note to investors.
GMP analyst Martin Landry reduced his price target on Cronos to $23 from $24, while maintaining a “hold” rating on the stock. He also lowered his revenue target for Cronos’ fiscal 2019 to $82.3 million from $93.9 million.
“Cronos has a strong management team and solid partner in Altria to accelerate its global growth. However, investors should await a better entry point,” Landry said in a note to investors.
Cronos shares were down 9.83 per cent, or $2.66, to $24.40 on the Toronto Stock Exchange as of 2:35 p.m. ET.
Other analysts who took bearish tones on Cronos’ fourth quarter include BMO Capital Markets, PI Financial, Eight Capital and Jefferies LLC, which stated in its note that it expects further results over the next year “will disappoint and see de-ratings [are] likely.”
However, it wasn’t all bad news from the analyst community. CIBC World Markets analyst John Zamparo maintained an “outperform” rating on Cronos’ stock with a $30 price target, highlighting the company’s future growth opportunities if U.S. cannabis banking reforms are passed, the possibility of mergers and acquisitions, and possible adult-use legalization in Israel.
“Cronos management has been far more reluctant than [their] peers to reveal capital allocation plans, particularly on the U.S. CBD industry. But we believe the company's capital deployment track record and asset-light approach give us conviction [that] capital will be deployed with discipline and a focus on long-term [return on invested capital],” Zampano said in a note to investors.
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