The importance of accessing a federally legalized cannabis market in the US was highlighted again last week as analysts opted to downgrade their target prices on Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) after the cannabis grower released its third quarter earnings.
Part of the poorer-than-expected performance is rooted in the fact that major marijuana growers are ready and revving to launch into the market, but the market is just not accessible to them.
Adding to the woes for Cronos was that a less-than-stellar report was widely telegraphed, as the company's results were delayed by several weeks. But when the figures were finally released, the biggest highlight ended up being a $236 million impairment charge associated with the company’s CBD operations in the United States.
Cronos saw its revenues for the quarter jump to $20.4 million, an increase of close to 80% compared with the same period the year before. Its EBITDA was $46.8 million. Although not bad, it was below analyst expectations.
Still standing on the sidelines of the US market, this Canadian-based grower did report $2.1 million in American business, drawing from mostly CBD-based products. But to give investors an idea of how untenable these low revenues levels are, the company announced it would be cutting between $20 million and $25 million in costs this year.
The reaction was swift, Cronos shares dropped.
And then, the analysts had their say.
According to media reports, Stifel analyst, Andrew Carter, in a note, said:
“EBITDA losses and cash burn remain significant with no guidance around ongoing cash needs to better evaluate the investment case.”
In a dramatic move, Cowen & Co. analyst, Vivien Azer cut her 12-month price target on the company’s shares in half to $4.50 from a previous target of $9.
According to BNN Bloomberg, Azer is “maintaining a ‘market perform’ rating on Cronos” because she believes “the company will need to do more work to cut costs beyond management expectations if it wants to become profitable.”
Azer also pointed out that the last quarter was the ninth consecutive three-month period with negative gross margins.
Over at BMO Capital Markets, analyst Tamy Chen also reduced her price target, but this time going even lower. Given the latest results, she pegged her target at $4, down from a previous mark of $6.50. And based on a reduced sales outlook for next year, maintained her market perform rating.
Reports quoted Chen:
"We believe the opportunity for cost reductions may be greater than the initial $20 million to $25 million target, but we suspect it will be difficult to achieve positive EBITDA until Cronos can enter (the) US cannabis (market).”
Shares of Cronos were up slightly on the day yesterday, closing at $3.50, an increase of just over 1%. This brings them back to almost the same level as just before the latest earnings report last week, but still a way off of their February high of just over $4 hit on Feb. 11.
Cronos shares have lost about 66% in the last 12 months. And there is still no firm timeline on when cannabis will be legalized at the national level in the US.