Cronos Stock Forecast 2019: Altria Deal, Supply Agreements, and E…

CRON Stock Forecast 2019

Like many marijuana stocks, shares of Cronos Group Inc (NASDAQ:CRON) had a wild ride in 2018. CRON stock rallied as investors warmed up to the cannabis industry in August, but fell deep into the doldrums during the market-wide sell-off later on.

Most recently, the Cronos Altria Group Inc (NYSE:MO) deal allowed CRON stock to soar again. For investors looking for a CRON stock forecast for 2019, here’s what you can expect from this volatile pot stock.

Cronos Group is a vertically integrated cannabis company headquartered in Toronto, Canada. It operates two wholly owned Canadian licensed producers: Peace Naturals Project Inc. and Original BC Ltd.

Note that Peace Naturals Project was the first non-incumbent company to be granted a medical cannabis production license by Health Canada.

Canada’s legalization of recreational marijuana for adult use on October 17, 2018 was one of the main reasons why investors were enthusiastic about the cannabis industry.

And while the market exhibited some “buy the rumor, sell the news” behavior—many marijuana stocks actually tanked after the legalization date—the outlook is undoubtedly bright for companies operating in the Canadian cannabis industry.

I should also point out that while Cronos Group is based in Canada, its shares also trade on the Nasdaq Stock Market.

Therefore, it’s very convenient for American investors to invest in the company. As a matter of fact, Cronos Group was the first cannabis stock to get listed on the Nasdaq.

Cronos in 2018 So Far

Chart courtesy of StockCharts.com

Cronos Group stock began trading on the Nasdaq on February 27, 2018. Investors quickly rushed toward CRON stock after its debut, but the momentum slowed down in March, and the stock traded sideways all the way till August.

What happened in August?

Well, looking back, a lot of marijuana stocks were firing on all cylinders in August.

One of the main catalysts behind this industry-wide rally was the news that Constellation Brands, Inc. (NYSE:STZ) decided to invest $4.0 billion in Canopy Growth Corp (NYSE:CGC). (Source: “Constellation Brands to Invest $5 Billion CAD ($4 Billion USD) in Canopy Growth to Establish Transformative Global Position and Alignment,” Constellation Brands, Inc., August 15, 2018.)

Constellation Brands, which offers well-known brands like “Corona” and “Modelo,” is one of the biggest producers and marketers of beer, wine, and spirits in the world.

Canopy Growth, on the other hand, is one of the biggest marijuana companies in the world. The investment from an alcoholic beverage giant obviously brought serious growth opportunities for Canopy Growth.

In August, Canopy Growth stock skyrocketed 73.6%.

The news also led to renewed investor enthusiasm toward the cannabis industry as a whole. And Cronos Group managed to climb on that profit train. In August 2018, CRON stock soared 63.3%.

We know that the U.S. stock market had a huge sell-off in October. And as we have seen in the past, when the markets are crashing, there has been a tendency for investors to first sell the stocks that went up a lot.

Since marijuana stocks were some of the biggest gainers before the downturn, they were hit particularly hard when the sell-off started. In the month of October, Cronos shares slipped from $11.12 to $7.42 apiece, marking a drop of over 33%.

Ouch!

Now, CRON stock is making another comeback. The reason has to do with a tobacco company. Will this lead to a rally like the alcohol company deal did to the industry earlier this year?

Let’s take a look.

Altria Investment

Altria Group, the maker of “Marlboro” cigarettes, is one of the largest tobacco companies in the world. On December 3, it was reported that Altria was in early-stage talks with Cronos about making a possible investment. (Source: “Altria in deal talks with cannabis company Cronos Group,” Reuters, December 3, 2018.)

Responding to the report, Cronos put out a statement on the same day, confirming that the companies were indeed having a discussion about a potential investment.

CRON stock jumped on the news and closed with an 11% gain on Monday.

Then today, Cronos announced that Altria agreed to invest $1.8 billion in the company. As you’d expect from such a big announcement, shares of CRON stock soared more than 20% on the news.

“Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth,” said Cronos Chairman, President, and Chief Executive Officer Mike Gorenstein. (Source: “Cronos Group Inc. Announces C$2.4 Billion Strategic Investment from Altria Group, Inc,” Cronos Group Inc, December 7, 2018.)

“The proceeds from Altria’s investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumers,” he continued.

Cigarette smoking has been declining for quite some time. According to new data from the Centers for Disease Control and Prevention (CDC), approximately 14% of adults in the U.S. were cigarette smokers in 2017, marking the lowest level ever. (Source: “Cigarette Smoking Among U.S. Adults Lowest Ever Recorded: 14% in 2017,” Centers for Disease Control and Prevention, November 8, 2018.)

Therefore, it shouldn’t come as a surprise that tobacco companies like Altria have been looking for opportunities to diversify their product portfolio. The cannabis industry seems to be a great fit.

Earlier this year, British tobacco company Imperial Brands PLC (LON:IMB) announced that it had invested in Oxford Cannabinoid Technologies, a biopharmaceutical company that develops cannabinoid-based compounds and therapies. (Source: “Imperial Brands Ventures Ltd announces investment in Oxford Cannabinoid Technologies,” Imperial Brands PLC, June 28, 2018.)

Cronos’ big tobacco partnership will likely open up new growth opportunities for the company. At the same time, it can leverage Altria’s decades of experience to better position itself in the adult consumer products industry.

Is Cronos a Good Stock for 2019?

Because of all the uncertainties facing the market right now, you can’t call marijuana stocks a guaranteed win in 2019.

However, you should also keep in mind that despite all the hype, Cronos Group actual runs a pretty solid business.

A Growing Business

The main reason why investors are attracted to marijuana stocks is their ability to grow. And on that front, CRON stock does not disappoint.

The company reported third-quarter earnings last month. For the quarter, Cronos Group generated $3.8 million of revenue, representing a whopping 186% increase from the $1.3 million earned in the year-ago period. (Source: “Cronos Group Inc. Announces Third Quarter 2018 Results,” Cronos Group Inc, November 13, 2018.)

The company sold a total of 514 kilograms of cannabis in the quarter, which more than tripled the 164 kilograms sold in the third quarter of 2017.

Huge Supply Agreement

One of Cronos Group’s highlights during the third quarter was the signing of a massive supply agreement with Cura Cannabis Solutions, one of the largest cannabis companies in the world by revenue.

Under this five-year, take-or-pay agreement, Cura Cannabis Solutions would purchase a minimum of 20,000 kilograms of cannabis every year from Cronos Growing Company Inc.

Now, you are probably wondering who this Cronos Growing Company is. Well, it’s a 50/50 joint venture between Cronos Group and a group of investors led by Bert Mucci, an experienced greenhouse operator and builder.

Under the partnership, Cronos Growing Company will build an 850,000-square-foot greenhouse on 100 acres of land in Kingsville, Ontario. The facility, once fully operational, is expected to produce up to 70,000 kilograms of cannabis per year. (Source: “Cronos Group Inc. Announces Capacity Expansion with Premier Greenhouse Expert,” Cronos Group Inc, July 18, 2018.)

International Expansion

If you’ve been following marijuana stocks, you’d know that companies like to talk about international expansion a lot.

But this is easier said than done. The reason is simple: Different countries have different marijuana laws, so even if you know how to produce and sell cannabis products in one country, it doesn’t necessarily mean you’ll be successful in another.

The good news is, Cronos Group is one of the few marijuana companies that actually have a good chance of succeeding internationally.

Last year, Cronos Group launched Cronos Israel, a joint venture with Israeli agricultural collective settlement Kibbutz Gan Shmuel.

Due to Israel’s ideal growing climate and Gan Shmuel’s skilled labor force and existing manufacturing infrastructure, the joint venture is expected to enable low-cost, high-quality cannabis production to meet the growing global demand.

Then there’s Cronos Australia Pty Ltd., a joint venture between Cronos Group and Australian-based NewSouthern Capital Pty Ltd. The joint venture was formed earlier this year and has already received medical cultivation, research, and manufacture licenses in the country.

At the same time, Cronos Group has an exclusive five-year supply agreement with Pohl-Boskamp in Germany, and an exclusive five-year supply agreement with Delfarma in Poland.

If the company makes material progress on these international endeavors in 2019, it would give investors another reason to like CRON stock.

Analyst Take

As of this writing, Cronos’ market capitalization stands at over $2.0 billion, which is quite a lot considering the amount of revenue the company is generating at the moment.

According to some, valuations in the cannabis industry are already bloated, and any sign of weakness would most definitely lead to a sell-off in marijuana stocks in 2019.

I, however, am a little more optimistic. Investors are forward-looking. The latest quarterly report showed that both production and revenue of Cronos Group were growing at a triple-digit pace.

At the same time, its joint ventures and supply agreements have pointed to a future where the company produces tens of thousands of kilograms of cannabis every year.

If Cronos Group Inc can keep up its growth momentum and achieve its true potential, CRON stock will likely see further upside.