Cruelty, thy name is earnings — for weed companies, anyway.
Cannabis companies in Canada have consistently over-promised and under-delivered for investors at earnings time, failing to achieve promised profitability, failing to hit guidance offered only weeks before earnings results, and struggling to sell enough product in Canada or elsewhere to justify their fattened valuations.
That is a big reason that those valuations have been on a severe diet: Since recreational marijuana was legalized in Canada last year, the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/lastsale MJ +0.17% has dropped 43%, Horizons Marijuana Life Sciences Index ETF /zigman2/quotes/208856346/delayed CA:HMMJ -0.45% has been sliced in half, and the Cannabis ETF /zigman2/quotes/213173823/lastsale THCX +0.59% , which made its debut in July, has fallen 37%. The benchmark S&P 500 index /zigman2/quotes/210599714/realtime SPX -3.37% has gained 23% during the year.
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The next major test for the tortured set of companies begins Monday, with the largest names in the sector reporting earnings just days ahead of deadline required by regulators. Publicly traded businesses must report within 45 days of the end of the previous quarter, which for companies that ended their quarter at the end of September arrives Thursday.
While short sellers are continuing to bet against weed companies, not everyone thinks there is more to lose. Cantor Fitzgerald initiated coverage of the sector this week, calling a bottom to the market. Analyst Pablo Zuanic wrote that valuations are at two-year lows, which makes the largest names in the sector attractive.
Here is what to expect from some of the largest cannabis companies.
Cronos Group Inc.
According to a report from Cowen analyst Vivien Azer, Cronos /zigman2/quotes/206842762/lastsale CRON -0.47% /zigman2/quotes/202715342/delayed CA:CRON -1.12% distributes to the smallest number of provinces — it hasn’t yet entered Quebec, Canada’s second-most-populous province, and just recently expanded into Alberta. “While Cronos has announced multiple third-party supply deals to improve its effective capacity, we have yet to see meaningful progression on improved distribution into the provinces,” Azer wrote.
Cronos continues to have a significant advantage compared with its peers in the form of a $1.8 billion investment from Altria Group Inc. /zigman2/quotes/208895754/lastsale MO 0.00% . The company elected to use some of that cash to buy Lord Jones, a U.S. CBD brand; prior to the acquisition, Cronos did not have hemp or CBD-related assets in the U.S., unlike some major rivals.
For more: Cronos paid $300 million for a small CBD company, and CEO’s private-equity firm stands to collect $120 million of it
Analysts polled by FactSet are expecting losses of 3 cents a share on revenue of C$13.7 million ($10.4 million). Cronos is set to announce earnings Tuesday before the opening bell and will have a conference call at 8:30 a.m. Eastern time.
Tilray /zigman2/quotes/209129655/lastsale TLRY +15.19% faces analyst expectations for a tough quarter. MKM Partners analyst Bill Kirk wrote in a note to clients that he is expecting high inventory levels at the retail and cultivator segments of the market will pressure shipments and pricing from Tilray.
For more: One year on, Canada’s legal cannabis market is down but not out
Kirk wrote in a note to clients that forward expectations for Tilray still remain too high and are based on the expectation that profitability is likely to improve. Profitability isn’t going to improve, Kirk writes, because cannabis prices would have to hold — they are declining as more supply becomes available — brands would have to expand into new markets, and export markets would need to demand Canada-grown cannabis.
Analysts polled by FactSet expect losses of 30 cents a share on sales of $49 million. Tilray is expected to release earnings after the closing bell Tuesday, and will host a conference call at 5 p.m. Eastern time.