Cronos Group stock was rising on Wednesday, thanks to a two-notch upgrade from Bank of America Merrill Lynch, which argues that a move into the U.S. CBD market could be a huge opportunity for the company, especially as it leverages the wide reach of tobacco partner Altria.
The back story. Cronos stock (ticker: CRON) has jumped almost 49% in 2019, and has risen more than 95% in the trailing 12-month period. Although the company still faces headwinds, such as marijuana shortages, small sales, U.S. roadblocks, and competition, that has done little to dampen investor enthusiasm for the industry, as investors bet that increased legalization in the U.S. and elsewhere will spur an explosion of pent up legal weed sales.
What’s new. On Wednesday, Bank of America analyst Christopher Carey boosted his rating on Cronos to Buy from Underperform, and raised his price target on the Canadian shares by C$10, to C$27. He notes that while the stock still sports a high multiple, even by marijuana stock standards, he has “improved confidence Cronos is near announcing its launch” of CBD products in the U.S., following recent management comments. (CBD is short for cannabidiol, a chemical compound in the cannabis plant.)
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That would improve the company’s “near-term visibility in the largest market for cannabis-derived compounds in the world.” It would also show that the company is starting to flex its “near group-leading balance sheet and partnerships [with Altria (MO)] to begin a transformation we see creating a vastly different company in the years ahead.” He is less inclined to be hung up on valuation—a major pillar of his formerly bearish thesis on the stock—which led to his upgrade.
Looking ahead. Carey pegs the U.S. CBD market at $2 billion now, and soaring to $11.5 billion in 2032, a figure that may still be conservative. He is calculating that Cronos will leverage Altria’s distribution network—in 230,000 stores already—to launch its own products, rather than buying its own cannabis retailer (as Canopy Growth (CGC) elected to do). “The potential to scale distribution nationally via Altria separates Cronos versus peers.”
He also thinks that, because the Food and Drug Administration still prohibits CBD in food additives in interstate commerce, Cronos will be more likely to sell creams, tinctures, and vapes and sprays in the U.S., filling in brand and intellectual-property gaps through mergers and acquisitions.
Cronos shares were up 8.3% to $15.61 Wednesday morning. The S&P 500 was up 0.2%.
Write to Teresa Rivas at teresa.rivas@barrons.com
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