Cronos Group, When Bigger Isn't Better
Cronos Group (NASDAQ: CRON) is far from being one of the largest Canadian cannabis producers. Cronos Group is also one of the highest quality cannabis stocks on the market today. Where the big boys like Aphria and Cannabis Growth Company are still struggling with the fallout of their early and ill-focused growth strategies Cronos is turning a profit and on track to produce real growth in the coming year.
Cronos Group Has A Blowout Quarter
Cronos Group had a stunning second quarter and one that proves without a doubt its long-term strategies are working. The company reported $15.62 million in net consolidated revenue for a gain of 24% sequentially, 58.1% year-over-year, and 102% in the two-year stack. Notably, a large portion of the sales was driven by the Canadian adult-use market which is coming back strongly following a year of COVID-19 restricted business.
Based on the company's efforts to reinvigorate existing brands, the launch of new brands across all verticals, and acquisitions we see Cronos’s growth continuing at a robust pace for the next four to six quarters at least. And that's not counting our expectations for US Federal legalization at some point in the next few years.
Moving down the report, the news only gets better because the company was able to significantly widened the margin. The company reported GAAP earnings of $0.15, that's right positive earnings, to beat the consensus by $0.22 cents. The only negative within the report that we can find is that adjusted earnings were negative but there is a mitigating factor. The adjusted loss is due primarily to inventory write-downs in markets affected by the pandemic. On an adjusted basis, the company's adjusted loss of $49.08 million is up $22.80 million from last year and also includes costs related to new product launches and the development of intellectual property that is expected to produce accretive results in the future.
Cronos Group Strategically Positions For U.S. Legalization
Cronos Group made another move to secure its position in the U.S. market ahead of the passage of federal legalization. Cronos, through a wholly-owned subsidiary, purchased options equal to a 10.5% stake in PharmaCann. PharmaCann is an East Coast-based, vertically integrated cannabis operator with 6 production facilities and 24 dispensaries in the Northeastern United States. The options will be exercised based on market conditions including passage of US Federal legalization and include a reciprocal agreement for both companies to offer products through the other.
This move is complementary to Cronos’s other partnerships focused on the Western and central portion of the U.S. The deal is worth roughly $110.40 million and will likely be paid in an all-cash or cash-and-stock arrangement. Cronos Group is well capitalized with over $1,000,000 in cash, equivalents, and other short-term investments.
“Our U.S. growth strategy focuses on delivering long-term shareholder value by assembling a best-in-class brand and intellectual property portfolio and positioning to deploy our products in the U.S. market through investments and opportunities with companies that share our vision and commitment to responsibly distributing disruptive cannabinoid products that improve people’s lives,” Said Kurt Schmidt c e o Of Cronos group.
The Technical Outlook: Cronos Is At Rock Bottom
Shares of Cronos corrected more than 50% over the past few months but are now sitting at rock bottom. The Q2 results have shares edging higher in early action and confirming support above the $7 to $7.50 level. Support is also indicated by both the MACD and the Stochastic which are consistent with a bullish reversal. Assuming price action continues to edge higher, we see this stock regaining the upper side of the short-term moving average fairly soon and then setting up for another rally later this year.
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