CRON - Cronos Group Q3 Preview: Don't Expect To Get High

2023-10-31 05:34:31 ET

Summary

• Cronos Group Inc. is expected to report Q3 earnings with analysts predicting losses on both GAAP and non-GAAP basis.
• The stock has been performing poorly, with significant declines in the last month, 6 months, YTD, and 5 years.
• The company is expected to have an 80% reduction in loss and a 5% decline in revenue if it meets estimates.
• Long term prospects remain good with legalization and rescheduling. But I forecast more pain in the short to medium term.

Cronos Group Inc. ( CRON ) is expected to report its Q3 earnings results pre-market on Wednesday, November 8th. Analysts expect the company to lose money on both GAAP and Non-GAAP basis on the back of $20.03 million in revenue.

Headquartered in Toronto, Canada, Cronos Group Inc, is an " innovative global cannabinoid company ", engaging in the production and distribution of cannabis. While we may still be in the early innings here, the company (and industry/sector in general) was projected to have a very bright future early on. However, the stock's action hasn't exactly followed the lofty expectations as the stock is down:

• 19% in the last month
• 6.50% in the last 6 months
• 31% YTD
• 44% in the last year
• 75% in the last 5 years

Earnings Expectations

Being a small cap, it is not surprising that the stock does not have too many revisions in the last 90 days heading into Q3, with just 5 revenue revisions and all 5 being downwards. As far as EPS is concerned, the company is expected to lose 2 cents/share on GAAP basis in Q3, down (or up in some sense) from the 5 cents loss expected at the beginning of the year.

Should Cronos Group meet the EPS and revenue estimates, it'd represent an 80% reduction in loss and a revenue decline by 5%. Overall, the company is expected to lose money on declining revenue.

Beat or Miss?

It's a coin toss as to whether the company will beat in the upcoming report as Cronos Group has beaten EPS estimates 3/8 times and revenue estimates 4/8 times. Being a small cap, the beats and misses have been by massive margins with some being as large as -375%. I am predicting that revenue will miss the target of $20.03 million based on the fact revenue declined 13% YoY in H1 and a double-digit decline from Q3 2022 will place Q3 2023's revenue at $18.81 million. EPS beat or miss will largely come down to the company's expenses but if revenue does decline at least 10% YoY, it is hard to see an EPS beat.

Things To Watch Out

• While Cronos Group is still debt free , its cash and short-term equivalents is just about $1 million and should the pressure on revenue continue, the company maybe forced to take on debt. To avoid debt, a key metric to monitor is cost of sales, which fell down just 2% YoY in H1 while revenue fell 13%.
• Cronos reported at the end of Q2 that it had $5.4 million revenue in Israel and this is extremely likely to have been impacted in Q3 by the unfortunate turn of events in the country recently, just as the region was shaping up to be Cronos Group's 2nd largest market. It will be interesting to see how Q3 report shapes up in this regard.

• In early July, news broke out that the company was evaluating interests shown by potential buyers. This seems logical from a potential buyer's perspective as the stock has taken a beating for a while and revenue has been under pressure recently and the company may perhaps be tempted to fold cheaper. Analysts are likely to bring this up during Q&A and it will be interesting to evaluate whether the company is focused on short term survival or long term stand-alone prospects.

Valuation

• Despite the stock's downtrend over all the time periods mentioned at the beginning of the article, CRON stock is trading at nearly 8 times Trailing Twelve Months' [TTM] revenue of ~$83 million heading into Q3 report. In short, extremely overvalued given the recent past and the medium term prospects.
• The stock's median price target of $2.43 from 8 analysts means the stock is trading just 40% below consensus. For a small cap and one that has already lost 31% YTD, that does not provide enough margin of safety in my opinion.

Technical Indicators

CRON's stock is trading below all the commonly used moving averages heading into Q3 report. The 200-Day moving average is about 15% away from the current market price and on top of that, the stock's Relative Strength Index [RSI] has been hovering close to the oversold levels. Overall, the stock is clearly in downtrend and only a very strong report is likely to arrest the decline.

Conclusion

I'd say things don't look too promising for Cronos Group Inc.'s stock heading into Q3. In the short to medium term, the stock is likely to be under pressure due to a combination of weakening sales, short-selling, regulatory threats , and the unfortunate situation in Israel. However, it is easy to see the long-term potential with this industry in general as US Federal legalization is a question of when and not if in my opinion. Before that, even a rescheduling will go a long way in restoring the market's confidence in this space.

Overall, while Cronos Group has the potential to higher (no pun intended), the current settings don't seem to be in favor of the company nor the stock. I rate it a weak "Hold".

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