BofA: Cronos Group Has Potential To Be Long-Term Cannabis Leader

Over the last six months, Cronos Group Inc. CRON shares have fallen by  43.3%.

The Analyst

Bank of America Merrill Lynch’s Christopher Carey maintained a Buy rating on Cronos Group with a $13 price objective.

The Thesis

BofA's price objective for Cronos is based on 20x CY20e EV/sales, Carey said in a Tuesday note. (See his track record here.)

The cannabis company's third-quarter results were "OK, with CRON leveraging the B2B channel to offload some inventory and drive sales, balanced by the fact that B2B is not a sustainable driver of long-term results in Canada, in our view," the analyst said. 

With 41 quarters of cash available, Cronos has the strongest balance sheet among the companies BofA covers, he said. 

"CRON cash on hand is a significant % of its company value, much higher vs peers. Capital combined with a forward-thinking and strong partnerships (e.g. Altria) position Cronos to potentially be a long-term leader in cannabis." 

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Capital deployment for M&A would bring upside risk to BofA's price objective, while the downside risks are valuation that is ahead of traditional industries and competition — and a risk-averse market that can cause cannabis stocks to fall, Carey said. 

A substantial amount of Cronos' third-quarter revenue came from B2B sales, implying that its adult use retail sales probably fell, the analyst said, adding that the company's results cannot be viewed as a read-through to the rest of the cannabis sector's earnings.

Price Action

Cronos shares were down 2.72% at $7.86 at the time of publication. 

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