Why Is PI Financial Bullish on Cronos Group?

On Thursday, Cantech Letter reported that Jason Zandberg of PI Financial reiterated its “buy” rating for Cronos Group (NASDAQ:CRON). He also maintained his target price of 17 Canadian dollars for the stock, which implies a return potential of 74.9% from its stock price of 9.72 Canadian dollars.

Zandberg expects Cronos Group’s revenue to rise

Cronos Group will report its fourth-quarter earnings on February 27. So, Zandberg updated clients before the company’s earnings. In the update, Zandberg stated that he expects Cronos Group to report revenue of 18.5 million Canadian dollars in the fourth quarter. The expectation implies a rise of 45.7% from 12.7 Canadian dollars in the third quarter. He expects pre-rolls and dried cannabis products to drive most of the company’s fourth-quarter revenue. Cronos Group introduced its Cannabis 2.0 products, like vape products, in late December 2019. So, Zandberg expects a minimal contribution from Cannabis 2.0 products.

Meanwhile, in September 2019, Cronos Group acquired Redwood Holding Group. The company produces and sells CBD-based beauty products under the brand Lord Jones. As reported by Cantech Letter, Zandberg stated that Lord Jones is capturing significant market share in CBD-based beauty products. He added that Lord Jones has been emerging as one of the major CBD-based beauty brands in the US.

Zandberg thinks that Sephora’s decision to introduce Lord Jones products in more than 70 of its stores could provide a significant upside for Cronos Group. For the fourth quarter, he expects the Canadian cannabis segment to contribute 14.5 million Canadian dollars, while Redwood Holdings could contribute 4.0 million Canadian dollars.

EBITDA could improve sequentially

As reported by Cantech Letter, Zandberg expects Cronos Group to report a negative EBITDA of 16.0 million Canadian dollars. The amount is an improvement from a negative EBITDA of 23.9 million Canadian dollars in the previous quarter. Zandberg added that his revenue and EBITDA estimates exceed analysts’ consensus expectations. Overall, analysts expect Cronos Group to report revenue of 16.7 million Canadian dollars. They expect the company to report a negative EBITDA of 21.4 million Canadian dollars.

For 2019, Zandberg expects Cronos Group to report revenues of 47.9 million Canadian dollars. Meanwhile, he expects the company’s revenue to rise by 327% to 204.4 million Canadian dollars in 2020. Moving to the EBITDA, Zandberg expects the company to report negative EBITDA of 66.7 million Canadian dollars in 2019 and a negative EBITDA of 7.1 million Canadian dollars in 2020.

Speaking about the company’s positives, Zandberg said, “As capital dries up in the industry, we believe CRON has enough war chest of ~$1.5B to fund its operations and capital projects and further expands its market share as the market matures. That said, we will be looking at cash burn to understand whether further funding will be necessary in the coming quarters/years.”

Other analysts’ recommendations

Ahead of the fourth-quarter earnings, analysts favor a “hold” rating for Cronos Group. Among the 13 analysts, seven recommend a “hold,” five recommend a “buy,” and one recommends a “sell.” As of Thursday, analysts’ consensus is 12.00 Canadian dollars, which implies a 12-month return potential of 23.5%.

Cronos Group’s stock performance

As of Thursday, Cronos Group was trading at 9.72 Canadian dollars. The amount represents a fall of 9.1% since the company’s third-quarter earnings on November 12. The company’s stock price fell due to the lower-than-expected performance in the third quarter and weakness in the cannabis sector.

After losing 30.7% of its stock value last year, Cronos Group is trading 2.5% lower this year as of Thursday. Meanwhile, Aphria (NYSE:APHA), Canopy Growth (NYSE:CGC), and Aurora Cannabis (NYSE:ACB) have returned -16.5%, 8.3%, and -20.1%, respectively.