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Why Cronos Group’s Q2 Earnings Failed to Impress

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Yesterday, Cronos Group (CRON) reported better-than-expected second-quarter sales, but its operating loss widened. The company’s strong second-quarter sales appear to have led its stock to rise before the market opened yesterday. However, during its earnings call, the company announced that its operating losses would increase in the second half. The announcement appears to have led to a fall in its stock price. CRON closed the day down 3.6% from its previous closing price.

Cronos’s management expects the increase in its investments in R&D (research and development), sales and marketing programs, and other growth initiatives to further increase its operating losses.

 

YTD stock performance

Despite yesterday’s fall, Cronos Group was up 28% YTD (year-to-date). Peers Innovative Industrial Properties (IIPR), Tilray (TLRY), and Aphria (APHA) returned 29.1%, -37.8%, and 13.1%, respectively, in the same period.

Innovative Industrial Properties reported better-than-expected sales in the second quarter. Aphria also outperformed analysts’ top and bottom line expectations in its latest quarter.

CRON’s growth initiatives

Cronos Group has adopted a supply chain with an asset-light approach to growth. The company is focusing on creating a network of co-manufacturing joint ventures and partners.

Recently, Cronos Group signed an agreement with third-party suppliers for the supply of concentrate and co-manufacturing services in Canada. The company expects these signings to aid in launching its new products in the Canadian derivative market later this year. The suppliers will utilize Cronos’s proprietary formulations to manufacture products.

Cronos also completed its previously announced acquisition of a fermentation and manufacturing facility from Apotex Fermentation in Canada on July 31.

R&D partnerships

In September 2018, Cronos partnered with Ginkgo Bioworks to produce cultured cannabinoids at a commercial scale. The companies are working on developing rare cannabinoids that are unable to be produced economically at high purities and quantities through traditional cultivation.

In the second quarter, the company established Cronos Device Labs. It formed the R&D center to develop next-generation vaporizer products, the industry’s fastest-growing and evolving category.

Cronos enters the US market

On August 2, Cronos announced that it had signed an agreement to acquire Redwood Holding Group, which manufactures and markets hemp-derived cannabidiol in the US.

We expect all these initiatives to drive Cronos Group’s revenue. Analysts expect the company to report revenues of 56.3 million Canadian dollars and 177.2 million Canadian dollars in 2019 and 2020, respectively. These expectations represent rises of 258.8% in 2019 and 214.5% in 2020.

Analysts’ recommendations

After Cronos reported its second-quarter earnings results, PI Financials and Canaccord Genuity upgraded its stock. PI Financials raised its rating to a “buy” from a “neutral,” while Canaccord raised its rating to a “hold” from a “sell.” Canaccord also hiked its 12-month price target from 16 Canadian dollars to 17 Canadian dollars.

Of the 12 analysts that follow Cronos, 58.3% call it a “hold,” 25% call it a “buy,” and 16.7% call it a “sell.” On average, analysts give Cronos a 12-month price target of 19.58 Canadian dollars, which represents a potential upside of 6.4%.

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