CRONOS Group: The shares react to Q4 shortfall

Fourth quarter results were released on Tuesday before the market opened. It did not go well. This was the first quarter for Cronos Group (CRON) to shine following Canada's legalization of cannabis last October. All eyes were on a company whose stock has been a star performer over the last year and which nearly doubled in 2019.

Consensus estimates called for Q4 revenues to reach CA$6.5 million ($4.84 million) and a breakeven bottom line. They actually fell short nearly $1 million at CA$5.6 million ($4.17 million) with a per-share loss of $0.06.

After running up 7+ percent just prior to the release, the shares are down over 3 percent at the time of this writing. The news separated the traders from long term investors. Today, the traders are in control.

For the record, full-year revenues came in at CA$15.7 million ($11.69 million) and a loss of $0.11 per share.

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Takeaways from the release

You have to dig deeply into CRON’s 34-page release to understand what happened. It raises a few questions. Ponder this point: the rate of revenue growth in Q4 was 248 percent. Compare this to the full year rate of growth at 285 percent. How is it possible that growth is slowing given that this was open season for legal cannabis in CRON's home territory of Canada?

Buried deep in the report is the fact that the actual number of kilograms sold grew even slower at 198 percent to 1040 in Q4. Once again this contrasts with the full year rate of 331 percent.

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If there was a bump from Canada legalizing cannabis for recreational use, it has not shown up, at least not as of yet. CRON’s dried cannabis sales totaled just 775 kilos in Q4, only 134 percent ahead of last year. Most cannabis companies with the same focus have reported far faster performance.

Cronos retail brands segment the price spectrum that could account for a 17 percent rise in average Q4 selling prices to $5.39. Even here the ASP is lower than the full year of $5.74.

Due to lower average selling prices, gross profit margins in Q4 of 44 percent were below the full year of 48 percent.  

How significant are these numbers?

It matters not whether you are a day trader or long term investor hoping to benefit from the $2.4 billion investment by Altria, each quarterly report is a gauge of progress in achieving your investment goals. The Q4 report provided little for which any of us should be excited.

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Most media reports reacted solely on the revenue shortfall. There is more to this story than just the revenue shortfall. It is only after you drill down into management's 34-page saga that you see the real picture. Since CRON made the mistake of reporting disappointing revenue numbers just prior to today’s stock market opening, don’t be surprised if there are some negative articles in the coming days.

What about the long term investor?

In the world of sizzling cannabis stocks, the grand prize winner will depend on how the market shakes out five-to-ten years from now. The Altria investment lends some assurance that CRON will participate in that prosperity. In the meantime, there are a few things to consider before expecting a repeat of the spectacular stock performance of the past year.

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CRON is currently valued at 208 times the latest 12 months sales, one of the highest of the top tier cannabis companies. There are many ways to justify this valuation so that not every investor is concerned about CRON’s price/sales distortion. The point here is that the likelihood of a stock price of 300-400 times sales is pretty darn remote. The odds favor the opposite: the valuation trends closer to their peers.

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