Cronos Group (NASDAQ:CRON) seems like an old tie-dyed t-shirt, found in a closet during the early Reagan era. It’s a pot producer. Marijuana was a hot niche back in 2018, which now seems like a long time ago. Cronos Group stock peaked at $21.54 in February 2019 but are now at the back of the bargain bin, trading at less than $6 per share.
But at that price, Cronos Group stock is still expensive. The market cap is $1.87 billion for a company that makes no money and may bring in $53 million in sales this year (70 million in Canadian dollars).
You need to smoke a lot of the product at that price to press the buy button.
The Israeli Connection
Cronos continues to have big plans.
During its second quarter conference call in August there was great hope expressed for the Israel market. The government there recently opened medical marijuana sales, and Cronos began selling its Peace Naturals brand there in June.
In Israel, Cronos products are produced by Kibbutz Gan Shmuel, then made available in a variety of forms to 35 countries in Europe and Asia. Cronos has also signed a venture there with a local researcher, testing the product and researching its use in skin care.
Management was happy to talk about Israel because the second quarter numbers were disappointing, a loss of $56 million, 31 cents per share, on revenue of $11.4 million. The pandemic forced a $3 million write down of inventory so there was even an operating loss of $3 million, compared with a profit of $4 million a year earlier. The company is expected to report a smaller loss, 6 cents a share, on revenue of $10.9 million for the September quarter.
During the quarter Cronos finished its acquisition of Redwood Holding Group, a CBD skin care outfit for which it had agreed to pay $300 million in 2019. Their products are sold under the name Lord Jones. They are at the center of what Cronos calls its “Cannabis 2.0” strategy, where pot is just a feedstock into other products.
Unfortunately, the 2020 pandemic has been an “extinction event” for many CBD companies, which crowded into what turned out to be a flat market.
The New Boss
Back in 2018, the dream of legal pot caused tobacco producer Altria (NYSE:MO) to take a 45% stake in Cronos, for which it paid $1.8 billion in 2019. It also got a warrant to buy 10% more for $1 billion and take control. That option is far out of the money, as the company is barely worth what Altria paid for less than half of it.
Altria wants to get its money out and to that end Cronos welcomed a new CEO in September. Kurt Schmidt was CEO of pet food maker Blue Buffalo until 2016. That company was bought by General Mills (NYSE:GIS) in 2018. He also has experience at Gerber and at Kraft Foods, now part of Kraft Heinz (NYSE:KHC).
The Bottom Line for Cronos Group Stock
Turning pot into a packaged consumer good, sold through brand names, is a long-time dream for the industry. It hasn’t come true because illegal pot is cheaper, especially in the U.S., and with legalization busting dealers is no longer a priority for police.
If Schmidt can work some of his packaged goods magic on the skin care line, Altria might get its money out.
But legal pot can’t take off until producers find a way around the illegal stuff. States that have looked seriously at legalization still have dollar signs in their eyes. Cronos and Altria must move them toward policies that maximize tax revenue by pushing down on competition.
It’s one of the great ironies of our time, lost in the smoke and the fire of 2020. Pot won’t rise until the tax man is on its side.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
