Based in Toronto, Canada, Cronos Group Inc. (CRON) is a cannabinoid company that manufactures and markets hemp-derived supplements and cosmetic products under the Lord Jones and Happy Dance brands in the United States. CRON’s stock has gained 28.1% over the past year due to its expanded distribution network and strategic investments. However, over the past three months, it the stock has declined 15.5%. This can be attributed primarily to the loss reported by the company for the first quarter of 2021.The stock is currently trading at $8.61, which is 45.5% below its 52-week high of $15.8.
While hopes for a federal level legalization of cannabis remain strong, it is highly unlikely that such a bill will be passed this year. This being the case could limit CRON’s growth.
Also, the marijuana sector has become crowded of late with new operators that are trying to grab market share from their peers. Amid this scenario, CRON is trading at a high valuation despite being unprofitable. So, we expect the stock to decline further in the near term.
Click here to check out our new Cannabis Industry Report for 2021
Here is what we think could influence CRON’s performance in the coming months:
Industry Headwinds
With New York, New Mexico, Connecticut and Virginia recently passing marijuana legalization bills, the number of states where recreational marijuana is legal stands at 18. While state-level legalization is gathering momentum, the substance’s fate at the federal level remains uncertain. The main barrier to full legalization nationwide is that many Republicans continue to oppose it. Also, given that several Senate Democrats have also voiced opposition to legalization, the chances of the bill’s approval in the Senate looks bleak this year. This suggests that the uncertainties associated with the authorized use of cannabis by consumers remain a threat to CRON’s growth.
At the same time, because the momentum of state-level legalization has attracted many new entrants to the industry, CRON might face difficulty in increasing its market share and generating substantial revenues.
Bleak Financials
CRON’s total operating expenses increased 5% year-over-year to $40.5 million in the first quarter, ended March 31, 2021. The company’s gross loss came in at $2.96 million, while its operating loss was $43.46 million. CRON generated a $161.63 million net loss, compared to $75.68 million in net income in the first quarter of 2020. Moreover, CRON’s comprehensive loss increased 282.4% year-over-year to $145.34 million over this period.
CRON’s trailing-12-month gross profit margin stands at negative 43.9%. And the company’s ROE, ROA and ROTC are negative 18.9%, 16.5% and 6.4%, respectively. CRON’s 0.03% asset turnover ratio is 92.3% lower than the 0.4% industry average. Its CAPEX/Sales ratio of 62.2% is significantly higher than the 4.1% industry average.
Premium Valuation
In terms of trailing-12-month EV/Sales, CRON is currently trading at 39.36x, 384.7% higher than the industry average of 8.12x. CRON’s trailing-12-month Price/Sales of 60.91x is 614.8% higher than the industry average of 8.52x.
Consensus Price Target Reflects Downside
Of five Wall Street analysts that rated the stock, two have rated it a Strong Sell. Currently trading at $8.61, analysts expect the stock to hit $7.23 in the near term, which indicates a potential 16% decline.
Unfavorable POWR Ratings
CRON has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. CRON has a Value Grade of F, given the stock’s premium valuation.
In terms of Quality Grade, CRON has an F also, which is in sync with its lower-than-industry-average gross profit margin.
Also, it has a D grade for Momentum, which is consistent with the stock’s negative returns over the past three months.
Click here to see the additional POWR Ratings for CRON (Stability, Sentiment, and Growth). CRON is ranked #28 of 30 stocks in the C-rated Agriculture industry.
There are several top-rated stocks in the same industry. Click here to access them.
Bottom Line
While its strategic investments and growing footprint could strengthen CRON’s business, it’s disappointing financial performance and negative profit margin do not bode well for the stock. Furthermore, the company’s revenue generating prospects could be further hurt by intensifying competition, with more states legalizing cannabis, and the uncertainty surrounding a federal level legalization of cannabis. So, we think it could be wise to avoid the stock now.
Click here to check out our new Cannabis Industry Report for 2021
CRON shares were trading at $8.68 per share on Thursday morning, up $0.07 (+0.81%). Year-to-date, CRON has gained 25.07%, versus a 13.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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