Seven months after Altria (NYSE:MO) acquired 45% of Cronos Group (NASDAQ:CRON) for $1.8 billion, the cigarette company’s CEO, Howard Willard, has got to be tickled pink with his multi-billion-dollar investment in Cronos stock.
Forget Cronos’ losses for a second and consider how much money Altria’s made in just seven months owning Cronos stock.
Altria paid $1.8 billion for 45% of the company. On a per-share basis, that works out to $12.19 a share. As I write this, CRON stock is trading at $13.88, providing Altria with an unrealized gain on its 147.7 million shares of $250 million or 24% annualized.
As for the warrants to up its ownership position to 55%, those are in the money by 31 cents; it has the right to purchase approximately 73.7 million shares at $13.57 a share.
The 55% ownership stake is based on paying $2.8 billion for approximately 221.4 million shares.
However, it’s important to point out that the exchange rate between when the deal was made in December and the execution of the warrants at some point in the next four years will have a bearing on the number of shares Altria actually receives, and the number of shares issued by the company in the future will also affect the cigarette company’s ultimate ownership stake.
Regardless of the final numbers, CEO Howard Willard has got to be happy to date with the company’s investment.
The Future Looks Bright
Although investors didn’t like the news that Cronos expects to generate higher losses in the second half of the year due to higher spending for both its Israeli research facility and increasing capacity for Peace Natural, its medical marijuana brand; Stifel analyst Andrew Carter sees the announcement as a good thing.
“We would be more concerned if … they were talking about cost discipline in the organization and trying to rein in investments at this point in the game,” Carter stated August 8.
The reality is that Cronos is making a lot of moves to position itself for future growth, moves upon which Altria would have to sign off as its largest and controlling shareholder.
I wouldn’t be surprised if the recent $300 million purchase of Los Angeles-based Redwood Holding Group, a manufacturer of hemp-derived cannabidiol (CBD) infused skincare and other hemp-derived products, was an idea hatched by Altria.
“Rob and Cindy have built a differentiated, best-in-class platform with hemp-based CBD formulations that stand for quality and consistency,” Cronos CEO Mike Gorenstein stated August 2.
The move indicates just how vital the hemp business is. As we’ve seen from other companies’ moves including Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY), as as the cannabis industry continues to mature and evolve, hemp will play a big part in its growth and evolution.
The Bottom Line on Cronos Stock
Have a look at the company’s Q2 2019 press release.
You’ll see that it’s got a lot of exciting initiatives are happening that will translate into future revenue generators for the company.
Don’t merely look at the kilograms of dried flower sold (1,584 kilograms sold, 232% higher than a year earlier) but pay attention to the big picture.
Altria isn’t thinking about the kilograms sold in 2019, it’s thinking about the multiple revenue streams generating hundreds of millions of dollars 5-10 years from now.
Do you really think that Howard Willard is worried about a $26 million loss in the first six months of the fiscal year? Altria generates billions in free cash flow.
If I’m Willard, I’d be pleased with Altria’s investment in Cronos stock so far.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.