As prices soar, Cronos Group closes in on securing deal with Altria
Not only did Cronos Group (NASDAQ:CRON) survive the December stock market freefall, it excelled quite nicely to the delight of its shareholders. Late last year, as the North American Marijuana Index fell nearly 25 percent, the outlook seemed bleak for cannabis investors.
Cronos Group continued to be a salmon swimming upstream, one of a select few of cannabis stocks that have continued to churn out incredible growth rates. In just a few weeks, the stock has increased by a whopping 45 percent.
Triple-digit quarterly earnings
Cronos generated nearly CA$4 million ($3.06 million) in revenue in Q3 2018, a triple-digit year-over-year increase of 186 percent. In the first three quarters of 2018, the company had CA$10.1 million ($7.72 million) in revenue compared to CA$2.5 million ($1.91 million) in 2017. Cronos sold a lot of cannabis in 2018 (514 kilograms), a 213 percent increase in Q3 compared to Q3 in 2017. A year ago, Cronos had about 7,000 cannabis plants; the company has more than tripled their cultivation, adding valuable assets to the company.
Many investors are wary of investing in weed stocks because of the volatility but also because of the legitimacy issue. Tobacco giant Altria Group Inc (NYSE:MO) put many fears to rest in December by making an unprecedented investment agreement for CA$2.4 billion (1.83 billion) in Cronos. The deal gives the famed maker of Marlboro cigarettes a 45 percent ownership in Cronos with warrant options to increase that ownership to 55 percent. As a result, many investors denoted Altria’s move as a sign of Cronos strength and therefore decided to jump into the market, sending the stock up.
The deal of the decade
Many deals were made in the cannabis industry in 2018, a trend likely to continue in 2019. The Cronos-Altria deal is a standout and just in time, it seems to help Altria’s declining U.S. cigarette sales.
The Marlboro maker held onto reasonable earnings in Q4 2018 which were better than expected, given the steep decline in cigarette sales in America. Vaping is having a tremendous impact as consumers make the switch from the more harmful effects of tobacco to the relatively safer e-cigarette. Tobacco sales fell 4.5 percent in 2018, compared to a growth rate of nearly 10 times that as e-cigarette sales increased 35 percent. CEO Howard Willard expects that sales will continue to decline at about the same clip for at least the next five years.
Yet Altria has weathered similar storms, and the company is ahead of the game given their major investment in Cronos. They have also made a very sizeable $12.8 billion investment in vaping startup Juul Labs Inc. Juul’s sales have experienced explosive growth, as the nimble startup maneuvered in 2018 to capture an astonishing 75 percent of the retail e-cigarette market. In 2017, Juul had $200 million in revenue; by 2018, that number exceeded $1 billion. Juul is quickly making progress in overseas markets like in the U.K., where the company captured 23 percent of retail sales in less than three months.
Willard says both deals will allow the tobacco giant to “support and even accelerate transition to noncombustible alternative products. Willard took over as CEO in May 2018 to help the company with its “transformative year.” Willard’s eye – and wallet – are on the global cannabis market, which Willard told shareholders could have an upside of $40 billion in just 10 years – without any new legalizations in any country. If marijuana were to be legal across the globe, the market could exceed $250 billion.
What’s happening now?
The Cronos-Altria deal officially triggers on February 21, and the companies have already sent materials to shareholders. Cronos is not the biggest player. By market cap, the company is much smaller than its sister companies like Canopy Growth Corp. (NYSE:CGC) or Tilray Inc. (NASDAQ:TLRY). Regardless, investors rarely see triple-digit growth rates in any company, so Cronos has separated itself from its peers in that regard.
Cronos currently sells medical and recreational marijuana products primarily in Canada with smaller medical cannabis operations in Australia and Germany, but Willard is quick to point out that people shouldn’t make assumptions that Cronos will continue to be a smaller player.
“You shouldn't assume that our existing product portfolio at Cronos is where we are going to stop. Both we and Cronos think that there are opportunities across the world in a variety of product categories, both recreational and medicinal.”
Many analysts share Willard’s view and continue to think that Cronos will steadily outperform, making it the darling of Wall Street for the foreseeable future.