Cronos Group: Featured Cannabis Stock
Should you invest in Cronos Group, CRON (Nasdaq), CRON (TSX)? Recommendation: See Below
Cronos is a cannabis investment company that invests in cannabis producers either with or actively seeking a production license. They have medical cannabis brands: Peace Naturals (Ontario) and OGBC (British Columbia). Both are licensed producers. Cronos is geographically diversified and vertically-integrated, with a presence on five continents. Its main activities are currently in Canada and Germany.
Fundamentals
Profile:
HQ: Toronto, ON, Canada
Founded: 2013, originally as PharmaCan
Facilities: Ontario, BC, Israel, Australia, Germany
Symbol: CRON (Nasdaq), CRON (TSX)
Focus: Strong
Cronos is a cannabis investment company that invests in cannabis producers either with, or actively seeking, a production license. These are in federally legal markets, and are typically Canadian companies. They have a few cannabis brands: Peace Naturals (Ontario), COVE, Spinach, PEACE, Lord Jones. Cronos is geographically diversified and vertically-integrated, with a presence on five continents. Its main activities are currently in Canada and Germany.
Market Cap: US $1.84 bil
Enterprise Value: US $1.03 bil
# of employees: 37
Primary: Canada
Secondary: Germany, Australia
Majority Subsidiaries:
-as of Feb 2018, owns a 50% of Cronos Australia, which is planning to construct a 20,000 sf indoor facility to produce up to 2,000 kgs of cannabis annually.
– owns a 50% interest in MedMen Canada Inc, which focuses on branding, R&D and creating a retail chain in provinces that permit private retailers. Medmen does not produce cannabis, will buy from Cronos.
– in March 2018, Cronos entered a joint venture with MedMen Enterprises USA, LLC.
Operations: Weak
Cultivation:
Current production: 6,650 kgs/year on 70,000 sf of grow space
Future capacity: 47,000 kgs/year on 420,000 sf of grow space
Cronos’ total planned capacity is low compared to its larger main competitors. When all capacity is completed, 84% of production will be in Ontario, the rest in BC (1%), Israel (11%) and Australia (5%). 86% of their cannabis will be grown in fully indoor facilities, 14% in greenhouses. This will make them a more expensive producer than others that focus on greenhouse production.
Their currently planned facilities in Ontario, belonging to Peace Naturals, will use 8 out of 90 owned and licensed acres, so they have room to expand further in the future. Cultivation has begun in the 28,000 sf greenhouse there, first harvest expected in Q2 2018
The British Columbia facility belongs to OGBC, including 13 licensed acres on 30 total acres.
Distribution:
Direct sales: Yes
Store networks: In expansion.
Cronos sells medical dried cannabis and oils through wholesale and direct-to-consumer channels under its medical cannabis brand, Peace Naturals.
Management Agreements/Joint Ventures:
Cronos Israel (90% ownership)
Cronos Growing CO (50%, Canada)
NatuEra S.a.r.l. (50%, Colombia)
Cronos Australia (31%)
Medmen Canada (50%, Canada)
Should you invest in Cronos Group CRON (Nasdaq), CRON (TSX)? Recommendation: See Below
Integration/Diversification
Vertically integrated: Yes
Horizontally diversified: No
Financials: Strong
Third Quarter 2019 Revenue: CAD 13.4 mil
Previous Quarter 2018 Revenue: CAD 3.7 mil
Outstanding shares (diluted): 348 mil
Cash: $1.8 bil
EPS: $0.88
Management: Neutral
CEO: Mike Gorenstein
CFO: Jerry Barbato
VP Finance: Kevin Gifford
Branding: Strong
Brands include Peace Naturals, Cove, Spinach, and Lord Jones, their CBD line. Peace Naturals is the health and wellness line, Cove the premium line, spinach is the mainstream line and lord jones concentrates on consumer goods for adults.
Valuation: Neutral
Current share price: US $5.26
Price to Sales: 66.72 (Tobacco industry = 5)
52 week low/high: US $4.43- $22.04
EV/Revenue: 16.83
Price/book: 1.29
Financings: Strong
The $2.4 billion invested by Altria has Cronos sitting pretty with $1.8 billion in cash. This amount dwarves all other cannabis companies who are struggling to raise enough cash to stay afloat.
Risks: High
The risks of investing in any cannabis or hemp company are currently high given the newness of the market. Given the recent financial delays and inventory problems, this medium risk is now high!
Recommendation: Neutral
In February 2018, Cronos Group became the first licensed producer to list on a major stock exchange in the United States. This brings more attention to the stock, more potential buyers and liquidity.
Cronos has a much smaller capacity expansion plan than quite a few other players, despite over a billion dollars in market capitalization. In addition, its indoor facilities will result in somewhat high operating costs, in the face of dropping prices. This does not present a highly attractive picture of the business going forward. The stock was recently overhyped and overvalued due to its Nasdaq listing and MedMen joint venture.
First, the good news. Cash is king. Due to their investment from Altria, they have a whopping $1.8 billion on hand. This amount is enough for them to expand, or to weather any upcoming storms.
Now for the bad. There is a storm to weather already in 2020. Maybe two. Cronos delayed the release of their fourth-quarter financials AND announced an upcoming inventory audit and likely write-down. These management missteps have the stock down over 25% and have brought on a class-action lawsuit by investors.
The price to sales ratio is 66, way too high to touch given the revenue of 13 million CAD in Q3 last year. The enterprise value to revenue is also very high, at 16.8. Both of these numbers will need to come down to below 6 for us to touch this stock in the short term.
Overall, given the flu fear, oil overproduction, and management missteps this stock is a loser in the short term. So interesting as without these three events, the stock would be on our strong list. So watch for the short term to suffer, while the long term could be rosy for Cronos Group. They are not going anywhere with that pile of cash.
Should you invest in Cronos Group CRON (Nasdaq), CRON (TSX)?
Cronos Group: Featured Cannabis Stock
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