Cronos Group TSX:CRON

Cron Stock

Cronos Group CRON

Cronos is an innovative global cannabinoid company based in Toronto. Incorporated in 2013, the company seeks to invest in medical marijuana producing companies through its vertical integration and horizontal diversification business model. It is one of the largest cannabis companies in the world.

Company Background

Cronos Group is a global cannabinoid company based in Toronto, Canada. Incorporated in January 2013, the company seeks to invest in either licensed or actively license-seeking medical marijuana companies. Consequently, it is committed to building industry-leading cannabis companies that elevate the consumer experience through brand expansion. Cronos Group is listed on Nasdaq and the Toronto Stock Exchange (TSX) under the ticker symbol “CRON.”

Cronos Group’s business model is based on vertical integration and horizontal diversification. The company primarily serves Canadian consumers through its two wholly-owned subsidiaries: Peace Naturals and Origin BC Ltd. Nevertheless, Cronos has been able to expand its production and distribution operations to many countries across five continents — prominently to Australia and Israel. The company continues to pursue an iconic international brand recognition through the expansion of its global operations.

Cronos Group’s mission is to improve people’s lives by unlocking the full potential of cannabis. Also, it is driven by the vision to transform industries through cannabinoid innovation. The company’s ever-increasing global network through partnerships and joint ventures portends that its mission and vision are easily achievable.

Industry Overview

Currently, the global cannabis industry is the fastest-growing industry in the world. In fact, analysts at the investment firm, Cowen, project that the global cannabis industry could generate as much as $75 billion by 2030. Interestingly, the industry recorded in global sales $6.9 billion in 2016, a figure which significantly increased to $9.5 billion and $12.2 billion in 2017 and 2018 respectively.

For the global cannabis industry, the impressive run from 2016 through 2017 and 2018 was not enough. The industry is seriously poised for sustainable and rapid growth. Little wonder analysts estimate that the figures would further be racked up for 2019. At the projected global revenue yearly increase of approximately 39%, global cannabis sales can easily hit $16.9 billion and $31.3 billion by 2019 and 2022 respectively.

Moreover, it is becoming increasingly easier to engage in the cannabis business. Recreational cannabis consumption has become legal in nine American states, while medical use is already okayed in 33. In a bid to control its illegal use, in October 2018, the Canadian government passed a bill fully legalizing the recreational use of cannabis for adults. Add to these the fact that for the cannabis business, the European market is still green. In fact, Germany depends solely on imported cannabis products to meet its local needs.

According to a report by the Canadian Business Executive, there are seven key factors that contribute to the success of any cannabis company. These include financing, corporate structuring, strategic partnerships, product diversity and differentiation, branding, marketing, and distribution. Therefore, with a business model centered around these factors, any cannabis company should be able to have prosperous runs. Let us see how Cronos has been faring on some of those.

Cronos: Strategic Deals Could Help Expand Production Capacity

Cronos Group primarily operates as a joint venture comprising Peace Naturals, Original BC, Cronos Israel, and Cronos Australia. Currently, all these facilities produce approximately 120,000 kilograms in peak annual yield. Still, this production capacity does not compare well with Cronos market capitalization, being one of the highest in the industry. Therefore, pushing to expand its production capacity has been one of its goals.

Another challenge that Cronos has been planning ahead for is the potential problem of domestic oversupply of cannabis. This, however, is not peculiar to Cronos: its peers too will be affected in any situation of such. Therefore, to prevent this, Cronos has been seeking to expand to international markets. Interestingly, the company has taken steps to boost production capacity and hedge against the risk of domestic oversupply.

Moreover, it is important to note that Cronos’ strategy to focus on alternative cannabis products with higher margins is an impressive one and should contribute to its profitability. In September 2018, it announced it would be entering into a partnership with Gingko Bioworks. The deal, valued at almost $100 million, would enable Cronos to use Gingko’s proprietary organism design technology. The technology, used to produce special yeast strains, can be applied to the production of improved cannabinoid.

The deal demonstrated Cronos’ commitment to increase its products base to more of alternative cannabis products. The novel technology, being more efficient than traditional techniques, will boost its alternative cannabis products manufacturing capacities, and subsequently its long-term operating margin.

The Gingko’s deal was followed, in December, with the strategic alliance made with Altria, one of the largest producers and distributors of cigarettes and allied products in the world. The tobacco company presumably seeks to work with Cronos on cannabis vape sometimes in the future.

Altria invested $1.8 billion in Cronos to gain control of a 45% equity stake in it. Plus warrants, the deal could shore up Altria’s stake to as much as 55%. The finalization of the deal and the issuing of more shares mean that Cronos would be $1.8 billion richer. These two deals have had a significant impact on Cronos “CRON,” to the extent that it rallied by more than 90% in January 2019 alone.

Financials Reveal Operating Losses

For the first quarter of 2019, Cronos’ net sales increased to $4.81 million, representing 120% year over year increase over the first quarter of 2018. Nevertheless, the company actually sustained a loss on an operating basis as the seemingly stellar revenues were due to one-time gains.

In February 2018, Cronos became the first marijuana company to uplist from the over-the-counter market to Nasdaq. The step confirmed its viability as a business helped boost the liquidity of its shares, and also enhanced its access to institutional investment. However, with its market capitalization of approximately $5 billion and a forward price-to-earnings ratio of almost 470 Cronos (CRON) might be overvalued. Currently, though, it has an estimated P/E ratio of 54.5×.

Summary

Cronos makes a good long-term investment. Generally, the cannabis industry has just started; it is no hype. And its members are expected to benefit from its growth. All the same, depending on the efforts of each, the benefits may not be equal. Cronos is poised to do great things. It surely makes a good long-term investment. However, it first has to improve its international market presence, manage its expenses, and control its operating losses.

 

 

About Travis Garlick 1530 Articles
Been writing about and trading stocks since 2013. Manage a group of micro-cap investors on Facebook with over 15,000 members. Turned $8,500 into 185k the first year I started trading stocks and haven't looked back.