Cronos Group (TSX:CRON)(NASDAQ:CRON) announced second-quarter earnings results on Thursday before the market open. This quarter’s earnings are quite the event for the cannabis industry given all the profit-boosting regulatory changes this year.
The company nearly tripled earnings during the first six months of 2019 versus the same period last year. However, very few investors showed up for Cronos’s earnings afterparty on the TSX. Despite announcing net revenue of almost $16 million, Cronos shares declined by around 3% on market open. Here’s what happened.
Canopy Growth announces two game-changing partnerships
Within two hours of Cronos reporting tremendous second-quarter revenue performance, Canopy Growth (TSX:WEED)(NYSE:CGC) stole the spotlight with two market-moving announcements. It almost seemed as if Canopy had scheduled both announcements to take attention away from Cronos deliberately.
Canopy Growth has launched a strategic patient support partnership with Medical Pharmacy Group Limited, a large pharmacy chain serving elderly long-term care residents. This relationship will give Canopy access to a crucial cannabis growth market: senior citizens who likely spent their college years smoking illegal, recreational marijuana.
It didn’t matter how great Cronos’s second-quarter earnings turned out to be. The event was never going to beat the image of retired 60s-generation grandmothers smoking pot in nursing homes over a game of Gin Rummy.
As if the market attention from the nursing home deal wasn’t enough, the company also released details of an extended agreement with Greenlane Holdings. Greenlane will continue to have exclusive distribution rights over Storz & Bickel vaporizers in the United States.
Storz & Bickel is a profitable subsidiary of Canopy Growth with 22 years of experience designing vaporizers. The partnership gives Canopy Growth access to over 11,000 retail locations from which to market the Storz & Bickel brand.
Cronos expands CBD capacity by 102,000 litres
TSX investors have sorely neglected Cronos stock. Cronos offers the highest return on equity and levered free cash flow in the cannabis industry. Last year, Cronos posted positive cash flow of $1.56 billion while investors were celebrating Canopy’s cash loss of almost negative $900 million.
Second-quarter earnings proved that Cronos has what it takes to win in the cannabis race. The company sold 1,584 kilograms of cannabis in the second quarter, 232% more than the same quarter last year. Moreover, Cronos has been expanding capacity with primarily cash on hand — demonstrating superior fiscal responsibility compared with Canopy Growth’s $945.97 million debt burden.
Just last month, Cronos paid cash for an 84,000-sq-ft fermentation facility in Manitoba. The purchase will augment biological manufacturing efficiency.
Hopefully, the improved efficiency from the new facility will lower the company’s current $3.01 cost of sales per gram. The only apparent downside in Cronos financials appears to be a rather high cost of production — a problem for the entire Canadian cannabis industry.
Foolish takeaway
The Cronos Group’s share price is likely to appreciate within the next year. Cannabis speculation has created unwarranted volatility and misleading stock price valuations — issues that are bound for a correction in the next 12 months.
Thus, cannabis investors should snap up Cronos shares while the stock is cheap and underappreciated. Even Canopy’s controversial marketing strategies to the elderly will not beat the fiscally responsible growth at Cronos.
