Cronos Stock Continues To Dive After Earnings Report Delay, BofA Lowers Price Target

Cannabis company Cronos Group Inc. CRON announced last week that it had to delay filing third-quarter earnings due to pending impairment charges for its U.S. CBD activities. 

The Toronto-based company was unable to file its quarterly report saying that its audit committee needed more time to evaluate goodwill and indefinite-lived intangible assets in its U.S. reporting unit for impairment.

The company expects that it will record an impairment charge of not less than $220 million on goodwill and indefinite-lived intangible assets in its U.S. reporting unit for the three and six months ended June 30, 2021, and may incur an additional impairment in the three months ended September 30, 2021. The impairment charge is not expected to impact cash and cash equivalents or revenues.

The Analyst 

BofA’s analyst Lisa K. Lewandowski reiterated an ‘Underperform’ rating on Cronos’ stock and lowered the price target to $5.00 from $6.50.

The Thesis 

Cronos stands out from the competition for its strong cash position of $1.1 billion, partnership with Altria MO and its hefty investments in science/innovation, Lewandowski wrote in her Thursday analyst note. 

While the analyst acknowledges the long-term potential of the cannabis industry driven by U.S. Federal legalization, she maintained the ‘Underperform’ rating on Cronos stock to address the company’s “lack of scale, issues in its US CBD unit and uncertainty surrounding its 3Q delay.”

Even though the company’s US unit includes such brands as Lord Jones, Happy Dance in collaboration with actress Kristen Bell and Peace, comprising 20% of overall 2020 sales, Lewandowski noted that its US CBD segment is a much smaller part of its growth opportunity compared to cannabis. 

Furthermore, recent CBD unit issues seem to have caused the analyst to wonder about the company’s ability to develop brands in the U.S. and its capital allocation strategy. 

“We forecast 3Q21 net sales of $17.2 million versus BofA prior $18.6 million and Visible Alpha (VA) consensus of $19.1 million. We look for gross margins at -17.9%e (consensus -13.7%e). We believe CRON’s path to gross margin improvement relies on higher sales /greater scale. We assume EBITDA losses slow quarter-over-quarter to -$35.9mn vs. -$49.8mn in 2Q; VA at -$31.4mn,” Lewandowski wrote.

The Price Action 

Cronos’ shares traded 9.19% lower at $5.05 per share at the time of writing Thursday morning. 

Photo: Courtesy of Markus Spiske on Unsplash