CRON - Cronos Group Q2 Earnings Preview: What To Watch For

2023-08-07 08:10:48 ET

Summary

• Cronos Group will report its Q2 results on August 8th, and I will be particularly interested in their comments on capital allocation.
• Due to the strategic repositioning, sales in Q2 are expected to be lower than in the prior year.
• Cronos Group's strong balance sheet provides downside protection, but the lack of a clear vision for cash allocation raises concerns.

When does Cronos Group report earnings?

Cronos Group (CRON) will report its Q2 results on Tuesday, August 8th and I am very excited about the results and especially the earnings call. I continue to believe that the cannabis industry could be very profitable in the future because it has many characteristics that I like for my investments. It is an addictive product, barriers to entry will likely be high, and I think it is a perfect product to build a brand like Marlboro.

What to expect from Cronos Group's Q2 earnings?

For me, it will be really interesting to see if they address the takeover speculation on their earnings call, because that could have a big impact on Cronos stock price. And hopefully there will be some discussion about their goals and future capital allocation because a lot of competitors that were over-leveraged are struggling right now and CRON could really use their cash war chest and buy some assets on the cheap.

I also think their growth rate will be higher than the Canadian and Israeli markets in the second quarter, and some of the new products from the first quarter really contributed to that. However, revenue will likely be lower year-over-year due to the strategic repositioning and lower sales in ROW.

In the Q1 earnings call, they talked about the slowdown in Israel and that they see the potential for a 3x increase in sales there because of the number of people using medical cannabis versus the number of people using it in Florida. Medical patients represent 1.3% of the total population in Israel and 3.7% in Florida, so Cronos sees an opportunity for more potential customers in Israel. So an update and how Israel did in Q2 will probably help to see how this situation has evolved.

Because sometimes it feels like CRON is like Altria's ( MO ) R&D operation for the cannabis industry, I am really interested in the innovations, new products and how the R&D spend has evolved. The trend over the past several years has been a reduction in R&D expenses, which were nearly halved from $23 million at December 21 to $11.4 million at TTM .

CRON has $836 million in cash + cash equivalents and they will get about $40 million in interest payments this year, but to me it looks like they lack a vision of what to do with that cash. They are not spending a lot on R&D, M&A or strong organic growth opportunities, so I am not really a fan of their capital allocation. As a potential shareholder, I would like to see the company invest in growth.

Is CRON a good stock to buy now?

Right now, the only thing that argues for investing in CRON stock is its strong balance sheet and the fact that it has Altria as a major shareholder. Canada and Israel will probably not be big enough to guarantee strong growth for years to come, and as I said, I do not see the future vision of what they want to do with their money.

Nevertheless, the balance sheet currently provides strong downside protection. But I would not start a new position at this time.

What is the long-term outlook for Cronos Group?

In the long run, I expect the US and Europe to be the two factors that will have the most impact on whether a company is successful or not in this industry. And from today's perspective, we cannot say which company will dominate in the next 5 to 10 years because there is a lot of uncertainty in this industry due to regulations and future barriers to entry.

Due to the cannabis stock hype in early 2021, stocks like Canopy (CGC), Cronos and SNDL Inc. (SNDL) are in the spotlight, while American counterparts like Green Thumb (GTBIF), Cresco Labs (CRLBF), Curaleaf (CURLF) or Trulieve are not getting as much attention. However, this may change in the future, especially if there is a binding regulation that is the same for all US states at some point in the future.

In my opinion, CRON may wait until the situation in the U.S. is clearer and then they will probably start to buy competitors or launch their products in the U.S. and invest heavily in growth. However, this can take a long time.

Cronos Group stock metrics

Cronos Group revenues will be approximately $100 million in FY23 and cash flows are expected to be net cash flow positive in 2024. However, it should be noted that net cash flow positive means including interest income. Much of Cronos' future business model is therefore focused on generating interest income rather than investing the cash in things that will grow the business.

CRON Valuation

CRON's P/S multiple indicates that the market believes that Cronos is the highest quality company in its peer group as it trades at a high premium. I would agree with that, but in an industry that is still in its infancy, a lot can change quickly.

Conclusion

It is too early to tell which companies in the industry will have competitive advantages and how the legal situation will evolve. Therefore, investments at this time are highly speculative, but could be very rewarding. Cronos, due to its fortress-like balance sheet, offers an option where the downside risk is relatively low as the company is currently trading close to its cash value.

Nevertheless, I would like to see them use their capital to try to generate strong returns on capital, because I think this is a good time to use the money to buy assets that could improve their future prospects or to invest more in R&D.

Because of Altria's large stake in Cronos, acquisitions by other companies are also a bit complicated, as I think they would want a reasonable price since they invested $1.8 billion in 2018, and their management team doesn't necessarily need another failed deal like JUUL.

As I said in my last article on Cronos , I still believe that staying on the sidelines is the best strategy right now, as it is very difficult to know which company will be the most successful, as there are simply too many unknown variables at this point.

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