How Altria Could Benefit from Its Cronos Group Investment

The details of the investment

On December 7, Altria Group (MO) announced that it had invested $1.8 billion in Cronos Group (CRON) for a 45% stake in the company, which could increase 10% over the next four years with a warrant at a price of 19.00 Canadian dollars per share.

After the deal closes, Altria will have the right to nominate four directors, which includes one independent director to Cronos Group’s board, which will expanded to seven from the current five directors. Altria expects the transaction to close in the first half of 2019.

How Altria Could Benefit from Its Cronos Group Investment

CRON’s growth prospects

On its fourth-quarter earnings call, Altria stated that the third-party report projected sales of cannabis around the globe to rise to $40 billion in next ten years under the present regulatory environment while sales are expected to increase to $250 billion under a fully legal market worldwide.

Altria’s investment in Cronos Group is expected to expand Cronos Group’s global footprint and production capacity. Also, the investment is likely to aid in cannabinoid innovation and the development of differentiated products in both the medicinal and recreational categories.

Analysts’ estimates and recommendations

In the fourth quarter of 2018, analysts expect Cronos Group to post revenue of 8.92 million Canadian dollars to take the total revenue for 2018 to 23.1 million Canadian dollars, which represents growth of 465% from 4.1 million Canadian dollars in 2017. For 2019, they expect Cronos Group’s revenue to rise 399.2% to 115.1 million Canadian dollars.

Cronos is expected to turn profitable in 2019 with its net profits to reach 24.8 million Canadian dollars. In 2018, the company’s net loss is expected at 8.0 million Canadian dollars.

Of the six analysts who follow Cronos Group, four recommend a “buy” and two favor a “hold.” On average, analysts have set a PT of 20 Canadian dollars, which represents a fall of 22.7% from the stock’s February 11 closing price of 25.87 Canadian dollars.

Next in this series, we’ll look at Altria’s valuation multiple and analysts’ recommendations.