Following its legalization in 2018, Canada’s cannabis industry witnessed a boom, significantly contributing to the country’s economy. Despite growing legalization, not all companies have been able to capitalize on the industry tailwinds. To that end, I think it could be best to steer clear of Cronos Group Inc. (CRON).
In this piece, I have discussed several reasons why it could be wise to avoid the stock now.
During the first quarter, CRON’s EPS and revenue failed to beat analyst estimates. Its EPS came 18.2% below the consensus estimate, while its revenue fell short of the analyst estimates by 17.7%.
The company witnessed a decrease in net revenue primarily due to lower cannabis flower sales in the Rest of World (ROW) segment and a decline in revenue in the U.S. segment. The ROW segment net revenue was also impacted by the weakened Canadian dollar and Israeli Shekel against the U.S. dollar.
The Israeli medical market has been challenged by competitive activity, a slowdown in patient permit authorizations, and geopolitical unrest, which has resulted in a decline in sales.
Moreover, CRON’s decline in gross profit was primarily driven by reduced gross profit in the ROW segment due to lower cannabis flower sales in Israel, an adverse price/mix shift in cannabis flower sales in Canada, increased returns, and a reduction in gross profit in the U.S. segment.
Although it’s been nearly five years since Canada legalized recreational cannabis for adults, the industry is now plagued with oversupply challenges. The oversupply problem has caused the prices of dry flower to plummet along with sales due to the fierce competition, as recreational marijuana is now legalized in 23 U.S. states.
For fiscal 2023, CRON expects its net revenue to be between $100 million and $110 million. Also, the company expects to achieve the higher end of the $10 million and $20 million operating expenses savings in 2023. It expects its cash flow for the last nine months of fiscal 2023 to decline by less than $25 million.
CRON’s stock has fallen 39.2% in price over the past year and 46.6% over the past six months to close its last trading session at $1.74.
Here are some factors that could influence CRON’s performance in the upcoming months:
Disappointing Financials
For the fiscal first quarter that ended March 31, 2023, CRON’s net revenue declined 19.5% year-over-year to $20.14 million. The company’s gross profit fell 65.6% over the prior-year quarter to $2.38 million. Its operating loss narrowed 39% year-over-year to $22 million. In addition, its net loss attributable to CRON and its loss per share came in at $19.17 million and $0.05, respectively.
Poor Profitability
In terms of the trailing-12-month asset turnover ratio, CRON’s 0.07x compares to the industry average of 0.35x. Its 8.53% trailing-12-month gross profit margin is 84.7% lower than the industry average of 55.77%. Likewise, its 4.07% trailing-12-month Capex/Sales is 12.3% lower than the 4.64% industry average.
Mixed Analyst Estimates
Analysts expect CRON’s EPS for fiscal 2023 and 2024 to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 4.5% and 23.7% year-over-year to $95.75 million and $118.46 million. Additionally, its EPS for the quarter ending June 30, 2023, is expected to remain negative. Its revenue for the same quarter is expected to increase 0.6% year-over-year to $23.13 million.
POWR Ratings Show Weakness
CRON has an overall D rating, equating to a Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CRON has a D grade for Quality, in sync with its poor profitability.
Within the D-rated Agriculture industry, CRON is ranked #25 out of 27 stocks. Click here to access CRON’s Growth, Value, Momentum, Stability, and Sentiment ratings.
Bottom Line
CRON’s stock is trading below its 50-day and 200-day moving averages of $1.86 and $2.51, respectively, indicating a downtrend. Amid persistent inflation, tough competition, oversupply problems, and regulation challenges, the company struggles to generate sales. Following a disappointing first quarter financial performance, the company could continue to remain unprofitable in the upcoming quarters.
Given its disappointing financials and poor profitability, it could be wise to avoid the stock now.
Stocks to Consider Instead of Cronos Group Inc. (CRON)
CRON has an overall POWR Rating of D, equating to a Sell rating. However, investors could check out these other stocks within the Agriculture industry with an A (Strong Buy) or B (Buy) rating: Golden Agri-Resources Ltd (GARPY), AGCO Corporation (AGCO), and MariMed Inc. (MRMD).
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CRON shares were trading at $1.78 per share on Friday afternoon, up $0.04 (+2.01%). Year-to-date, CRON has declined -29.92%, versus a 12.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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