Why Is Raymond James Bullish on Cronos Group?

On February 7, Rahul Sarugaser of Raymond James reiterated his “outperform” rating for Cronos Group (NASDAQ:CRON). As reported by Cantech Letter, Sarugaser described Cronos Group as “an overlooked gem in the cannabis sector.” He’s optimistic about the company’s partnership with Altria Group (NYSE:MO) and its potential in US CBD markets. However, he added that investors aren’t giving the necessary credit to the company.

In his client’s note, Sarugaser discussed the slower-than-expected rollout of cannabis retail stores in Canada and a glut of supplies. Cannabis companies didn’t perform well in the second half of 2019. He also said that these factors dragged the companies’ valuation multiples down. He thinks that cannabis companies will continue their poor performance in the upcoming fourth quarter as well.

However, Sarugaser is optimistic about Cannabis 2.0 products. He thinks that Cannabis 2.0 products could drive cannabis companies’ revenues from the second quarter of 2020. Sarugaser thinks that by the end of the fourth quarter of 2020, there would be a wide gap between the companies that are well-capitalized from others.

He also said, “We expect these continuing sector headwinds to drive the second bottom we predicted would occur in February or March 2020. We predict a rebound among strong, fiscally prudent operators beginning ~May 2020, materializing more fully in 2H20 with the realization of Cannabis 2.0 sales and, perhaps, the expansion of retail cannabis store footprint across Canada, particularly in Ontario, driving accelerated sell-through.”

US market key for Cronos Group’s growth

As reported by Cantech Letter, Sarugaser doesn’t think that it’s right to value the company based just on its revenues in Canada. With Altria’s strong distribution network and its disruptive biosynthesis partnership with Ginkgo Bioworks, Cronos Group has a huge scope to expand in the US. Altria’s approximately 250,000 points of distribution across the US could be a huge sales driver for Cronos Group. Meanwhile, Canopy Growth (TSE:WEED) only sells its CBD products online under the First & Free CBD brand.

For fiscal 2020, Sarugaser expects Cronos Group to report revenue of 166 million Canadian dollars. He also expects the company’s EBITDA to be negative 7 million Canadian dollars.

Analysts’ expectations

For the fourth quarter of fiscal 2019, analysts expect the company to report revenues of 16.7 million Canadian dollars with a negative EBITDA of 21.4 million Canadian dollars. For fiscal 2020, analysts expect Cronos Group to report revenues of 148 million Canadian dollars—210% growth from 47.7 million Canadian dollars in fiscal 2019. They expect the company to report a negative EBITDA of 49.1 million Canadian dollars in fiscal 2020—an improvement from a negative 71.7 million Canadian dollars in 2019.

Other analysts’ recommendations for Cronos Group

Among the 13 analysts that follow Cronos Group, five recommend a “buy.” Meanwhile, seven recommend a “hold” and one recommends a “sell.” As of February 7, analysts’ consensus target price is 12.0 Canadian dollars. The target price implies a 12-month return potential of 31.4%. Last month, Jefferies cut its target price for Cronos Group from 10 Canadian dollars to 7 Canadian dollars.

Stock performance

After falling 30.7% last year, Cronos Group has lost 8.4% of its stock value this year. The company’s stock price fell due to weak third-quarter earnings and weakness in the cannabis sector due to pricing pressure. Meanwhile, Canopy Growth, Aphria (NYSE:APHA), and Aurora Cannabis (NYSE:ACB) have fallen by 4.4%, 17.4%, and 19.0%, YTD, respectively. Cronos Group will report its fourth-quarter earnings on February 27. Stay tuned for our earnings preview.