Why Did Cronos Group (TSX:CRON) Stock Trade 9% Lower After Q1 Earnings on Thursday?

Cannabis producer Cronos Group (TSX:CRON)(NASDAQ:CRON) shares traded as low as 9.6% on Thursday after the cash-rich company released a mixed bag of Q1 2019 results before market open.

The company actually showed some improvements in its financial performance as compared to a previous quarter, but revenue growth, the market’s main focus today, was much weaker than desirable.

Not-so-impressive revenue growth

Marijuana investors are looking out for massive revenue-growth rates on this industry’s stocks, and Cronos Group delivered a modest 15% quarter-over-quarter increase in the top line to $6.5 million for the first quarter of this year. This was supported mainly by increased productivity that saw the company sell 7% more product volumes at 1,111 kilograms of cannabis equivalents during the quarter as compared to a most recent quarter.

As previously discussed, sales growth may remain subdued during the first half of this year due to productive capacity constraints.

Gross margin improvements

Even better, the gross margin before fair-value adjustments has rebounded this time from 44% in Q4 2018 back to 54%, just as the overall gross margin ballooned from 16% a quarter ago to a staggering 191% for the quarter. To the extent that overall gross margins are heavily influenced by biological assets valuations, I wouldn’t bank on the gross margin measure much, as it will continuously fluctuate with agricultural production.

Still no details on recreational cannabis

Cronos management hasn’t yet decided to break down cannabis sales into medical and consumer sales buckets, so the investment community can easily judge the company’s performance in each of these critical segments. This can be very frustrating, as market dynamics are likely to be divergent for the two distinct revenue categories.

That said, the company is gaining more traction in the recreational use market with provincial wins, as it increased the number of provincial agreements to five during the quarter to cover over 58% of the Canadian population. Management anticipates covering more geographical markets as the company’s production footprint expands further.

Marginally improved production cost profile

The company managed to report an 11% reduction in cost of sales per gram before fair-value adjustments to $2.69, down from $3.02 in the previous quarter.

Thanks to improvements in productivity, the company can now manage to spread overheads over more output, but the cost per gram readings are still far away from an ideal $1 a gram or less to cushion the firm from further product price weaknesses as a massive production ramp up across the industry threatens market oversupply.

Investor takeaway

Investors are already looking past the $2.4 billion Altria investment the company closed during the quarter, and they are not impressed by the slower-than-desirable revenue-growth rate. A $6.5 million quarterly revenue run rate is just hard to justify on a $6.4 billion stock that still seems far from ramping up production to its 117,000-kilogram capacity target by the end of next year.

There’s some great growth potential in export revenues as Israel production is now permissible to be exported, but the company hasn’t been able to use its massive Germany distribution deal to its advantage yet.

I wait to see how the company’s innovative ambitions to create cannabinoids from fermentation processes will disrupt the young cannabis industry, but its escapades with majority investor Altria will likely steer it to become a major player in the emerging cannabinoids market.

One more thing: Altria’s outstanding warrants to increase its stake to 55% in the marijuana firm has been recorded as a $1.6 billion derivative liability on Cronos’s books. There will be severe volatility in the company’s future earnings, as this liability is revalued in line with the company’s share price, and the valuation gains and losses will wreak havoc on the income statement.

Free investor brief: Our 3 top SELL recommendations for 2019

Just one ticking time bomb in your portfolio can set you back months – or years – when it comes to achieving your financial goals. There’s almost nothing worse than watching your hard-earned nest egg dwindle!

That’s why The Motley Fool Canada’s analyst team has put together this FREE investor brief, including the names and tickers of 3 TSX stocks they believe are set to LOSE you money.

Stock #1 is a household name – a one-time TSX blue chip that too many investors have left sitting idly in their accounts, hoping the company’s prospects will improve (especially after one more government bailout).

Still, our analysts rate this company a firm SELL.

Don’t miss out. Click here to see all three names right now.

More reading

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

Source: The Fool
Why Did Cronos Group (TSX:CRON) Stock Trade 9% Lower After Q1 Earnings on Thursday?
The Fool

The Motley Fool
Contributor for investorsnews.ca
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts