After the rumors turned for months, Altria Group (NYSE: MO) finally made his move, announcing today that he is investing $ 1.8 billion in marijuana stocks Cronos Group  (NASDAQ: CRON) .
The investment of Altria – producer of cigarette brands including Marlboro – offers exposure to a global market that could be worth $ 200 billion over 15 years. And it provides Cronos Group with liquidity and regulatory expertise to capitalize on the legalization of marijuana throughout the world.
A big problem
The investment of Altria is not as great as the investment made by the wine and spirits company Constellation Brands [1
At a price of $ 16.25 Canadian per share ($ 12.12), the $ 1.8 billion investment in Altria requires him to hold a 45% stake in Cronos. Altria will appoint four board members to the Cronos Group board of directors, one of whom will be independent, and will receive a mandate that will allow him to increase his ownership by a further 10% within four years at the price of $ 19 per Cronos share.
This agreement is particularly significant because it injects confidence in the nascent marijuana industry at a time when it is needed.
Marijuana stocks, including Cronos, rallied higher in view of the opening of the Canadian recreational marijuana market in October, but since then they have been in decline due to reports of supply shortages; uncertainty about when Health Canada will expand eligible products into its recreational market including vapors, high-margin foods and beverages, and concern for assessments.
Why Altria is Investing in Marijuana
Marijuana remains a 1 drug program in the United States, so it is banned at the federal level. But 33 states have legalized the use of marijuana in one form or another, including 10 that have created recreational marijuana markets.
The impetus towards legalization is likely to continue as 66% of Americans (over 50% of conservative Republican voters) prefer this, according to Gallup. Washington could still repress marijuana companies operating in states where it is legal, but evidence suggests that the likelihood of it is decreasing.
For example, Congress has recently included laws in its latest bill that allows farmers more freedom to grow hemp, a low – the variation of THC of cannabis sativa and the Food and Drug Administration have granted the 39; approval during the summer for a marijuana-related medicinal product for epilepsy.
The $ 50 billion US market will remain fragmented until marijuana prohibition ends federally, but it is a different story in Canada. That country's medical marijuana market has been flourishing since the changes created a regulatory licensing and selling path in 2014, and medical marijuana sales amounted to hundreds of millions of dollars annually. On October 17, the country's recreational market was open for business at the national level, and although estimates do vary, Deloitte thinks that recreational marijuana sales can eclipse $ 4 billion next year.
Marijuana-resistant seas are also loosening in other markets, including Australia and Europe, and industry watchers think that one day the legal marijuana market could be as large as alcohol or tobacco. For example, Constellation Brands estimates that legal marijuana sales worldwide could exceed $ 200 billion over 15 years.
What Altria gets
Cronos Group follows its competitors in sales and production, but is growing rapidly. In the third quarter, sales increased by 186% to $ 3.8 million, selling 514 kilograms of marijuana, an increase of 213% over the previous year
The company's annual production capacity is only 6.650 kilograms now, but a share offering before this year has provided $ 146 million that it is using to increase its capacity to 40,150 kilograms at the start of next year and at the end to 117,000 kilograms at the # 39; year.
The Cronos brands include Peace Naturals, sold as medical marijuana, and Cove and Spinach, two recreational brands available to consumers in Ontario, British Columbia, Nova Scotia and Prince Edward Island. A premium hand-finished product, Cove is positioned as a luxury brand, while Spinach is marketed as a traditional product for consumers who "do not take life too seriously".
Should you also buy Cronos Group?
Altria Group is a Goliath with extensive sales experience in highly regulated markets. He is an expert in supply chain and marketing, and has important distribution connections that the Cronos Group can exploit to improve its operations and connect with customers.
$ 1.8 billion in cash that Altria's delivery provides Cronos with some of the industry's deepest pockets, which should enable it to accelerate production growth and compete with wealthy peers, including Canopy Growth, for better acquisitions .
But it is not clear when the Cronos Group will make a profit. In the third quarter, the company's total operating expenses were $ 6.97 million, or 185% of sales, and Cronos lost $ 7.3 million, or $ 0.04 per share.
Cronos is not an economic stock based on traditional valuation parameters because of its losses, but given the long-term market prospects of Constellation Brands and the fact that Altria's investment substantially valued Cronos at around $ 4. billions, investors may wish to consider including this stock in their long-term growth portfolios.