The maker of Marlboro cigarettes is gaining a 'unique entry into cannabis'

Ethel Jiang

Dec 10, 2018, 21:15 IST

The maker of Marlboro cigarettes is gaining a 'unique entry into cannabis'

Altria's $1.8 billion investment in the cannabis producer Cronos is mutually beneficial, a Cowen analyst says.
Cronos has a focus on rare cannabinoids, which has greater potential than just focusing on the two most known cannabinoids, Azer added.
Cronos can leverage Altria's expertise to focus on ingredient composition without reliance on a massive cultivation infrastructure, Azer said.
Watch Altria and Cronos trade live.

Marlboro cigarette maker Altria's $1.8 billion investment in the cannabis producer Cronos is a win-win, according to an analyst.

"Cronos provides Altria a unique entry into cannabis and we do not think Altria is taking on outsized risk while entering a new high-growth category," Vivien Azer, an analyst at Cowen, said in a note out on Monday.

Cronos has a relatively smaller cultivation capacity than most of the other major Canadian cannabis producers, but a higher efficient operating line, Azer says. While Cronos's revenue over the last 12 months - $12 million sales -ranked only the sixth among major Canadian marijuana producers, its gross margin ranked second.

"Cronos has been judicious with capital, and has embraced an asset light model that does not prioritize cultivation (consistent with tobacco)," Azer noted. "Their business model is less capital focused and more reliant on sourcing cannabis from local farmers, similar to tobacco companies."

Moreover, Cronos' focus on rare cannabinoids is a point of differentiation for Altria, Azer said.

"While the potential uses of cannabinoids are vast, Cronos believes the key to successfully bringing cannabinoid-based products to market is in creating reliable, consistent and scalable production of a full spectrum of the ~100 cannabinoids, not just THC and CBD," which are the two primary cannabinoids that occur naturally in the Cannabis, she added.

Azer believes Cronos can leverage Altria's expertise to create value-added form factors while focusing on ingredient composition without reliance on a massive cultivation infrastructure.

Azer has an "outperform" rating and a $74 price target for Altria - a 40% premium to where shares are trading on Monday.

Altria is now down 24% this year.