The bullish case for Cronos Group Inc (NASDAQ: CRON)(TSX:CRON) has come to an end after the company requested an extension to its earnings release, according to Stifel.
The Cronos Analyst
W. Andrew Carter downgraded Cronos Group from Buy to Hold with a price target lowered from CA$12 to CA$8.
The Cronos Thesis
Cronos requested a 15-day extension to release its earnings report and it's unlikely management will be able to adhere to the extension, Carter wrote in the note. At the core of the delay is an investigation related to revenue recognition practices. The company hired "outside counsel and forensic accountants," which likely signals "larger issues" will be uncovered.
Carter said the more likely outcome is any wrongdoings are a function of "undetected behavior" and management is "fully incentivized to pursue a definitive conclusion" with full transparency. In addition, tobacco giant Altria Group Inc's (NYSE: MO) $2.5 billion investment in Cronos adds another level of assurance to investors given its majority board control.
Nevertheless, news of the delayed reporting by itself is reason enough to believe the stock will remain "in a holding pattern," despite the cannabis company's competitive advantage and superior net cash position. In fact, the company's long-term outlook remains unchanged as Cronos deserves credit for taking early advantage of the Canadian vapor market and a commitment to winning the global cannabis market.
Carter said Cronos is likely to request a 180-day extension to its earnings report and will need to submit a plan of action to the Nasdaq exchange, but the company has "ample resources to remedy the situation."
CRON Price Action
Shares of U.S.-listed Cronos were trading lower by more than 11% at $5.34.