Cronos Group: There are green shoots in the middle of the weeds (NASDAQ:CRON)

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Oleksandra Troyan

About Cronus Group

Cronos Group Inc. (CRON) was founded in 2012 and is headquartered in Toronto, Canada. The company describes itself as an innovative global cannabinoid company that focuses on four main strategic priorities:

Stock performance to date

What The chart above shows that CRON is down 33.57% YTD. However, this is much better than the other constituents in The Canadian Cannabis LP Index consisting of the 5 largest vertically integrated (i.e. from seed to sale) Canadian Licensed Growers (LPS) as follows:

ACB CGC CRON OGI TLRY

-76.52% -66.48% -33.57% -47.38% -49.12%

Sector-wide, many Canadian cannabis stocks are down more than 50% in 2022 due to New cannabis companies, a leading industry newsletter. On 11/7/22, CRON reported a third quarter revenue loss of $2.95 million ($24.75 million vs. $21.80 million) and a GAAP EPS loss of $0.04 (-$ 0.10 vs. -$0.06). The stock closed at $2.79, down 9.42% from volume of 4.1 million, which is more than double its 90-day average volume of $1.9 million.

Quantitative and factor ratings

chron has a looking for alpha quantitative rating of 3.5 and is the only member of the cohort, other than OGI, to earn a “buy” rating. The company’s valuation, growth, profitability, momentum and reviews factor grades also compare favorably with the other stocks in The Canadian Cannabis LP Index. CRON has a beta of 1.45, which is 2North Dakota lower to beta OGIs of 1.30, which is a favorable indicator.

Analyst price target

According to the ten analysts who follow CRON, the average price target is $4.01, which would be a 30.1% increase based on the closing price of $2.79 on 7/11/22.

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Q3 10-Q

The key points from my review of CRON’s three primary financial statements filed with the SEC on 11/7/22 are as follows:

Balance sheet

As shown above, CRON had ~$8.9M in cash and cash equivalents and short-term investments as of 09/30/22. They have a strength balance with an unholy current ratio of 25.4.

Statement of income

As shown above, CRON has made good progress in reducing its net loss by ~$173.4M or 65.9% Y/Y.

Cash flow statement

As shown above, CRON has made good progress in reducing its cash flow used in operating activities by ~$53.1M or 45.1% Y/Y.

As shown above, CRON has made good progress in reducing its cash flow used in operating activities by ~$53.1M or 45.1% Y/Y.

earnings conference call

My key takeaways from the 7/11/22 CRON earnings conference call are as follows:

  • Israel’s net revenue from the PEACE NATURALS brand increased 88% year over year to $7 million, or 88% year over year.
  • Strong financial results from Cronus Australia (AUX:CAU). In my opinion, CRON should seriously consider increasing its stake in CAU.
  • CRON is on track to reach the cost savings target of $20-$25 million in operating expenses in 2022.
  • The expansion of the product line bodes well for the future.

Macro and micro risks

The cannabinoid industry is still in its formative stages and subject to continual turmoil. CRON faces competitors that have much more financial power. But in my opinion, the resolution of the SEC and OSC accounting issues announced on 10/24/22 was a groundbreaking event. On 03/25/20 I posted a bearish article on CRON, and this issue took over 2 1/2 years to resolve. Now that it has, I think CRON will be able to focus its efforts on executing its business plan.

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conclusion

Based on the financial and operating analysis above, Cronos Group Inc. faces challenges as it attempts to gain a foothold in the emerging cannabinoid sector. Disappointing third quarter operating results may cripple the stock price for the foreseeable future. But significant progress has been made to remedy its profit and loss problems, and management is committed to “resizing” its cost structure in its quest for profitability. I think investors with a high risk tolerance should seriously consider taking an early position in CRON with a nominal portion of their “mad money” as there are green shoots amidst the weeds.

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