Why Is Raymond James Bullish on Cronos Group?

Earlier this week, Rahul Sarugaser of Raymond James upgraded Cronos Group (NASDAQ:CRON) from “market perform” to “outperform,” as reported by Cantech Letter. He also raised his target price from 6.50 Canadian dollars to 10 Canadian dollars. The new target price represents an upside of 16.8% from the current position.

As reported by Cantech Letter, Sarugaser was bullish on Cronos Group’s partnership with Ginkgo Bioworks. In 2018, Cronos Group signed a partnership with a genetic engineering firm to produce a portfolio of cannabinoids. The Cantech Letter article said that the biosynthetically produced cannabinoids only require lab-derived engineering. The products are cheaper since the company avoids the expensive process of growing plants. Also, the article said that synthetic cannabinoids will produce purer compounds that will be useful in pharma and derivative markets.

Sarugaser estimates that the cost of producing cannabinoids in labs could range from 2,000 Candian dollars per kilogram to 100 Canadian dollars per kilogram depending on the engineering optimization and scale. So, he stated that Cronos Group should be reevaluated based on the potential of biosynthetically-generated cannabis compounds in the global market.

For this fiscal year, Sarugaser expects Cronos Group to report revenue of 44 million Canadian dollars. He expects the company’s EBITDA losses to be 81 million Canadian dollars. For the next fiscal year, he expects the company to report revenue of 100 million Canadian dollars. Sarugaser expects the EBITDA losses to be at 70 million Canadian dollars for the next fiscal year.

Last month, Cronos Group reported a lower-than-expected first-quarter performance. Since the company’s earnings, CIBC, Stifel, and Jefferies all lowered their target prices. As of June 25, analysts’ consensus target price was 8.60 Canadian dollars. The target price represents a 12-month return potential of 0.4% from its current stock price. Overall, analysts favor a “hold” rating for the stock. Among the 12 analysts, 58.3% recommend a “hold,” 25% recommend a “buy,” and 16.7% recommend a “sell.”

So far this year, Cronos Group has lost 14.1% of its stock value. The lower-than-expected first-quarter performance and weakness in the cannabis sector led to a fall in the company’s stock price. During the quarter, the company’s revenue was 11.3 million Canadian dollars, which missed analysts’ expectations of 13 million Canadian dollars. The operating losses were at 31.9 million Canadian dollars. The amount was higher than analysts’ expectation of 29.4 million Canadian dollars.

However, the company has outperformed its peers and cannabis ETFs. YTD, Aphria (NYSE:APHA), OrganiGram Holdings (NASDAQ:OGI), and Aurora Cannabis (NYSE:ACB) have fallen by 15%, 25.4%, and 46.4%, respectively. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has declined by 17.7% during the same period. A strong balance sheet and Altria’s backing appear supported Cronos Group stock.