Summary
- Altria invested $1.8 billion in Cronos. That investment has not paid off so far.
- Cronos has spent one-quarter of the funds from Altria, including purchasing a CBD company for 34x sales.
- First-quarter results at Cronos included cannabis revenue growth but declining CBD sales and a third consecutive quarter of inventory impairment.
- Cronos trades at a premium to its peers despite its issues.
- I do not believe the company is worth that premium.
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Source: Cronos
Summary
Altria (MO) made two big, flashy investments in December 2018: investing $1.8 billion into Cronos (CRON) and $12.8 billion into Juul. Neither investment has paid dividends: as of March 31, Altria is down $8.6 billion on Juul (67%) and $536 million on Cronos (31%).
Cronos has spent one-quarter of the money it received from Altria. About half of this money went towards the $300 million purchase of Lord Jones CBD. That business saw its revenue decline 19% sequentially to $2.2 million in the first quarter. Until business improves, Cronos paid 34x run-rate sales for a business with 50% gross margins in a competitive sector with few barriers to entry.
The company's cannabis business, meanwhile, has reported mixed results. Revenues have increased over the past five quarters, improving Cronos to the 7th-largest Canadian cannabis company from its prior position as 9th-largest. However, the company has also impaired inventory for three consecutive quarters and significantly overstated revenue twice last year, prompting an SEC inquiry.
Despite these issues, Cronos trades for a premium over all its significant peers. In my view, the company does not warrant this premium, and I plan to continue avoiding any investment in Cronos.
Cronos Dreams Big: Small Cannabis Maker Sells Global Vision
The Cronos/Altria partnership was set to create a leading global cannabis platform. Source: Cronos.
Huge investment; questionable recipient: Seventeen months ago, Altria invested $1.8 billion into Cronos. This investment was part of a pattern of Altria's investments in "sin" sectors outside of its core cigarette market, along with a much larger investment in Juul two weeks later. Altria's investment was, and is, the second-largest investment in the cannabis sector.
In exchange for its $1.8 billion, Altria received a 45% equity stake in Cronos at a price of C$16.25 per share. It also received warrants to take this stake up to 55% ownership. Those warrants cost C$19 per share to exercise and expire on March 8, 2023. Altria's investment is down ~54% from this purchase price.
The company had also considered an investment in Aphria (OTC:APHA), but ultimately chose Cronos as its cannabis partner. The pair aimed to create a leading global cannabis platform.
Altria's investment was terrific for Cronos but very questionable for Altria itself. When the deal was announced, I publicly questioned whether the company had made the correct choice:
