Cronos (CRON) to Report Q4 Earnings: What's in the Cards?

Cronos Group CRON missed earnings expectations by 50.0% in the third quarter of 2018. Let us see what is in store for the fourth quarter.

Factors in Focus

Cronos is a globally diversified and vertically integrated cannabis company. The company has footprint in four continents.

Cronos operates two wholly-owned Canadian licensed producers regulated under Health Canada’s Access to Cannabis for Medical Purposes Regulations — Peace Naturals Project Inc., which was the first non-incumbent medical cannabis license granted by Health Canada, and Original BC Ltd., which is based in the Okanagan Valley, British Columbia.

The company sells dried cannabis and cannabis oils through wholesale and direct-to-consumer channels under its medical cannabis brand. Cronos has multiple international production and distribution platforms, including in Germany, Poland, Israel and Australia.

In October 2018, Canada became the first G7 country and the second country in the world to legalize cannabis sales for adult recreational use.

Cronos is actively engaged in this distribution channel and is currently selling dried cannabis, pre-rolls and cannabis oils to Ontario, British Columbia, Nova Scotia and Prince Edward Island, which collectively represent more than 50% of the Canadian population.

The company posted solid sales growth in the third quarter, driven by increased production capacity and higher volumes sold through the domestic medical and international channels, and initial shipments into the domestic adult-use recreational market. We expect the momentum to continue in the fourth quarter as well.

In October 2018, Cronos entered into a sponsored research agreement with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology to explore the use of cannabinoids and their role in regulating skin health and skin disorders. Earlier in September 2018, Cronos and Aleafia Health Inc. initiated a joint medical cannabis study to improve the management and treatment of insomnia and daytime sleepiness. In August 2018, Cronos announced a supply agreement with Cura Cannabis Solutions, one of the largest cannabis companies in the world. Cura signed a five-year take-or-pay supply agreement to purchase a minimum of 20,000 kilograms of cannabis per annum from Cronos GrowCo, as and when it receives production and sales licenses from Health Canada.

In June 2018, Cronos entered into a strategic distribution partnership with Delfarma Sp. Zo.o. Per the five-year exclusive distribution agreement, Cronos will supply PEACE NATURALS branded cannabis products to Delfarma for distribution within Poland.

Hence, investors will focus on pipeline progress and updates when Cronos reports fourth -quarter results.

Meanwhile, in February 2019, Cronos shareholders unanimously approved the previously announced strategic investment agreement with Altria Group, Inc. MO. Per the agreement, Altria will make an approximately C$2.4-billion equity investment in Cronos on a private-placement basis in exchange for common shares. In addition, Altria will receive warrants of Cronos Group that if fully exercised, would provide the latter with an additional approximately C$1.4 billion of proceeds. Consequently, Altria will hold approximately 45% ownership interest in Cronos and further exercise of the warrants would result in incremental ownership of 10% for a total potential ownership position of 55%.

Earnings Whispers

Our proven model does not conclusively show that Cronos will beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. Unfortunately, that is not the case here, as you will see below.

Earnings ESP: The Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.0%. You can uncover the best stocks to buy or sell, before they’re reported, with our Earnings ESP Filter.

Zacks Rank: Cronos currently carries a Zacks Rank #3, but the 0.0% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.