Cronos Group (NASDAQ:CRON) reports its fourth-quarter and fiscal 2019 results on Feb. 27 before the markets open. While the top-line and bottom-line numbers won’t do much to drive cannabis investors into CRON stock, I do believe that the company will have lots to say about the year ahead.
And Cronos should have lots of good things to report.
In 2020, I continue to see the company as one of the must-own Canadian cannabis stocks. Here’s why.
Altria Will Continue to Help Cronos Grow
If you’ve followed Cronos for some time, you’re likely aware that Altria (NYSE:MO), the maker of Marlboro cigarettes, invested $1.8 billion in the company in December 2018. The investment gave Altria a 45% stake and warrants to up its ownership to 55% in the future.
Around the time Altria made its investment, I argued that compared to its Juul Labs investment, the cigarette company got a steal buying 45% of Cronos. Fast forward to today and the numbers would suggest my rationale was correct.
Altria recently announced that it would have to take another $4.1 billion charge on its investment in Juul in the fourth quarter. The latest impairment is due to growing litigation against the e-cigarette company. The company valued Juul at $12 billion, down from the 2018 value of $38 billion. That means its investment is worth only $4.2 billion.
By comparison, Altria’s 149.8 million shares of Cronos stock are worth just over $1 billion as I write this. That’s 44% less than what the company paid at the end of 2018. In approximately the same amount of time, Altria’s investment in Juul has fallen in value by 67%.
If I’m Altria CEO Howard Willard, I’ve got to be hopping mad that my Juul investment has lost 10 times as much money over the past 14 months.
Given all the troubles e-cigarettes have faced over the past year, I continue to believe that Altria’s upside is far more significant with Cronos. For Cronos, Altria’s involvement is a blessing, not a curse. That’s especially true if Willard wants to remain CEO. He can’t afford to have two duds on his hands.
Altria will put more effort into growing Cronos in 2020 as a result. Others agree.
Raymond James Likes CRON Stock
Raymond James analyst Rahul Sarugaser recently wrote in a note to clients that Cronos has more going for it than most investors realize. Sarugaser mentioned both its relationship with Altria and its move into the U.S. CBD market as critical reasons the company has a bright future.
That said, the analyst believes Cannabis 2.0 benefits won’t kick in until the second half of 2020.
“We predict a rebound among strong, fiscally prudent operators beginning ~May 2020, materializing more fully in 2H20 with the realization of Cannabis 2.0 sales and, perhaps, the expansion of retail cannabis store footprint across Canada, particularly in Ontario, driving accelerated sell-through,” Sarugaser wrote.
The analyst pointed to Cronos’ significant cash balance of almost $2 billion and its fiscal discipline as reasons why it’s positioned better than most.
As I said in November, of the top seven cannabis companies in Canada, Cronos and Canopy Growth (NYSE:CGC) are the strongest financially of the bunch. After what’s happened to Aurora Cannabis (NYSE:ACB) in recent weeks, my assessment seems even more accurate today.
The Bottom Line
Another interesting point Sarugaser made is that Altria has more than 250,000 points of distribution through convenience stores in the U.S. Those will become very important for expanding Cronos’ U.S. CBD business.
Sarugaser has a “buy” rating on its stock and a $9.03 price target. His target implies upside of 31% over the next 12 months.
I continue to believe that when it comes to Canadian cannabis stocks, the better the balance sheet, the safer the investment. I still see Cronos as a long-term buy at current prices.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.