5 Takeaways From CannTrust Holdings’s (TSX:TRST) Redeeming Q1 Earnings

Here are some important notes on cannabis stock CannTrust Holdings Inc’s (TSX:TRST)(NYSE:CTST) latest earnings report.

Canadian marijuana producer CannTrust Holdings (TSX:TRST)(NYSE:CTST) stock rallied as high as 11% during morning trade on Tuesday, as the market reacted to the company’s latest quarterly earnings installment. Investors had some justifiable reasons to celebrate the company’s redeeming set of financials after a poor show in a previous quarter. I’ll discuss some notable takeaways from the quarterly installment.

A strong medical sales performance

The company added 10,000 more medical marijuana patients to reach 68,000 active customers to record a marvelous 17% sequential growth in registered patient numbers within just three months.

In turn, medical product sales increased 18% sequentially, and this was a significant contributor to revenue growth for the quarter, just as wholesale or recreational sales declined 16% quarter on quarter.

Total revenue grew 4.2% sequentially, and this was a softer performance which was significantly made up for by celebrated margin and productivity improvements, even as sales volumes declined.

Total sales volumes decline

A slightly concerning development — total sales volumes on a cannabis kilograms equivalent basis declined by 11.5% sequentially to 3,014 kilograms during the last quarter. Wholesale sales led the declines, and this could be explained by a weaker marijuana retail sales reading for February at country level.

Hopefully, there could be some seasonality to customer traits in winter to justify weaker sales, and a sustained demand growth will be witnessed going forward, or else, there could be a bigger problem for industry stocks if anticipated high recreational market growth rates do not materialize.

An unsustainable source of growth?

CannTrust managed to realize marginal sales price increases across all product categories to report a 15% sequential growth in average price per gram of $5.47 a gram for the quarter. The revenue mix, identified as another culprit for margin contractions in the previous quarter, was more favourable this time, as medical cannabis prices and volumes both increased while lower-margin wholesale sales volumes declined.

The company won’t sustain the trend of increasing prices going forward as market structure, dominated by few provincial buyers and heavy medical market competition, won’t allow that to be a consistent source of profitability and revenue growth.

I do like the improved margins, though.

Gross margin improvements

The company’s gross margin before biological assets fair-value adjustments rebounded significantly from a low of 35% in a previous quarter to a respectable 43%. Though still lower than the 63% margin achieved for the same quarter in 2018, the margin expansion was an impressive achievement considering the new excise taxes levied in October 2018, and the fact that management decided to absorb all excise taxes on medical sales.

Margin growth was aided by better productivity that lowered average production costs per gram, the average price increases noted above, and the lower contributions of wholesale dried cannabis to total sales.

Quarterly production nearly doubled quarter over quarter to 9,424 kilograms of marijuana as new productive space came online, leading to lower cash costs per gram, but there’s more room for improvement if the company is to rank among the industry’s low-cost producers.

A marked improvement in profitability

The company emphatically swung back to accounting profitability during the quarter to report a $12.8 million net profit after a $25.5 million bottom-line loss in a previous quarter, but I am more impressed by adjusted EBITDA, a more trusted measure of operating profitability, which showed an encouraging improvement from a quarterly loss of $8.5 million in a previous quarter to a smaller $3.8 million loss during the first three months of this year.

Further operating earnings improvements could favourably support the share price going forward.

Foolish bottom line

The company’s latest earnings installment looks much better than the previous one, and any continued operating results improvement may be celebrated by the market.

Top-line growth could be sustained, as the company distributes adult-use cannabis to all 10 provinces in Canada now, but I like the impressive show in the more resilient medical sales segment, as this could bring more stability to future operating cash flows.

That said, it’s too early to read into any long-term trends, though there were some good reasons to celebrate the improved performance, but there is a worrying weakness in retail sales that needs to go away as soon as possible.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »