Altria ( MO) made two big, fancy financial investments in December 2018: investing $1.8 billion into Cronos ( CRON) and $128 billion into Juul. Neither investment has actually paid dividends: since March 31, Altria is down $8.6 billion on Juul (67%) and $536 million on Cronos (31%).
Cronos has actually spent one-quarter of the money it received from Altria. About half of this cash went towards the $300 million purchase of Lord Jones CBD. That organisation saw its revenue decrease 19%sequentially to $2.2 million in the first quarter. Up until service enhances, Cronos paid 34 x run-rate sales for an organisation with 50%gross margins in a competitive sector with couple of barriers to entry.
The business’s cannabis business, on the other hand, has reported mixed outcomes. Profits have increased over the past 5 quarters, improving Cronos to the 7th-largest Canadian marijuana business from its previous position as 9th-largest. The business has likewise impaired inventory for 3 successive quarters and considerably overemphasized profits two times last year, prompting an SEC questions
In spite of these problems, Cronos trades for a premium over all its substantial peers. In my view, the business does not necessitate this premium, and I plan to continue preventing any investment in Cronos.
Cronos Dreams Big: Little Marijuana Maker Sells Global Vision
The Cronos/Altria partnership was set to develop a leading global marijuana platform. Source: Cronos.
Big investment; doubtful recipient: Seventeen months back, Altria invested $1.8 billion into Cronos. This investment belonged to a pattern of Altria’s investments in “sin” sectors beyond its core cigarette market, together with a much larger investment in Juul 2 weeks later. Altria’s investment was, and is, the second-largest financial investment in the marijuana sector.
In exchange for its $1.8 billion, Altria got a 45%equity stake in Cronos at a cost of C$1625 per share. It likewise got warrants to take this stake approximately 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 business had likewise thought about an investment in Aphria ( OTC: APHA), but ultimately selected Cronos as its marijuana partner. The pair intended to develop a leading global marijuana platform.
Altria’s investment was excellent for Cronos but very questionable for Altria itself. When the deal was revealed, I publicly questioned whether the business had made the right option:
” This is a dangerous offer for Altria shareholders. Altria is paying a high price for a medium-sized Canadian marijuana producer, and I believe it will be difficult for them to get full value from this deal.” -Dec 8, 2018
This story is not over yet – Cronos stays a growing marijuana company in an emerging market – but thus far, Altria’s investment does not appear to be a wise one. Instead of shrewdly purchasing a strong marijuana business at a low cost, it appears that Altria purchased into buzz near the peak of marijuana euphoria.
Withering Away: Cronos Spends Altria’s Money
At the time of Altria’s financial investment, Cronos was a little, cash-poor, money-burning marijuana company. In the fourth quarter of 2018, it had $24 countless cash in the bank, income of $4.3 million, and an annual money burn of $240 million. Given that money burn, the business were rather brief on money, and Altria’s billions resembled manna from paradise.
Fast forward fifteen months to the first quarter of 2020.
Cronos has invested one-quarter of the funds from Altria on a CBD business and losses from operations and growth. Source: Author, based on company filings.
Huge costs; modest development: Today, Cronos has actually invested one-quarter of Altria’s $1.8 billion financial investment. Half of that money went to the $300 million purchase of a small, partially insider-owned CBD company, Lord Jones. The rest of this capital has actually been spent on operating losses and capital expenditures. Strangely enough, capital investment reduced after Altria’s financial investment – Cronos spent $88 million in 2018 before getting Altria’s money however only $39 million in 2019.
Thanks in part to Altria’s investment, Cronos has been able to decently enhance its standing among worldwide cannabis companies.
At the time of Altria’s financial investment, Cronos was the 9th-largest Canadian cannabis business by revenue, trailing behind each of Canopy Development ( CGC), Aurora ( ACB), Aphria, Tilray ( TLRY), CannTrust ( CTST), HEXO Corp. ( HEXO), Organigram ( OGI) and Supreme Marijuana ( SPRWF) (in descending order of earnings). Today, it is the 7th-largest Canadian marijuana business by earnings. Its CBD profits has put the company ahead of Supreme Marijuana (pending first-quarter outcomes on May 15), while CannTrust stopped working due to scandal, as I’ve previously discussed
Cronos invests 4 times as much on running expenses as it sells in cannabis. Source: Author, based on business filings.
Cronos released its first-quarter results on May 8th Shares fell decently on these results. The highlights of these outcomes include:
- Income grew 15%to $8.4 million. Marijuana income grew 36%sequentially, while CBD profits fell 19%.
- Gross margins were marred by stock impairment for the third successive quarter. This caused reported gross margins of -77%. Missing disability, CBD gross margins were a healthy 50%, while marijuana gross margins were a dismal 6%.
- Operating costs of $39 million, or more than 4.5 x greater than earnings, although they fell 11%sequentially due to one-time expenses last quarter.
- Totally free cash flow improved to a $45 million cash burn, a modest improvement from $54 million last quarter. In both quarters, most of this burn is due to operating losses.
- Cronos ended the quarter with $1.3 billion in cash, down $171 million from last quarter.
Maybe the best aspect of these results was the strong development in marijuana profits. That news was balanced out by very bad cannabis gross margins of only 6%, compared to 48%last quarter.
CBD sales falling is a bad sign for Cronos’ $300 million Lord Jones financial investment, which I have formerly questioned. Falling CBD sales were announced on the exact same day that CV Sciences( OTCQB: CVSI), a small independent CBD business, announced its third consecutive quarter of double-digit CBD revenue declines. Maybe, as I suggested for Charlotte’s Web previously, the flower is off the CBD increased throughout the sector and consumers are tired of paying top dollar for below-medical doses of non-intoxicating CBD.
Cronos reports a non-operating gain due to its falling stock cost. Source: Cronos filings.
Due to the nature of Altria’s warrants and top-up rights (anti-dilution arrangements), Cronos reports a big non-cash, non-operating profit whenever its share price falls.
Cronos is extremely costly based on forward sales, while forward EBITDA is negative.
I see Cronos as a badly run mid-sized marijuana business which has actually been a bad steward of Altria’s capital.
Simply put, I see Cronos as Altria’s second-largest error behind its investment in Juul. Neither deal has paid dividends. I do not plan to start a position in Cronos.
Make much better marijuana financial investments with much better info
The Development Operation is the biggest neighborhood of cannabis investors on Looking for Alpha.
Disclosure: I/we have no positions in any stocks pointed out, and no strategies to start any positions within the next 72 hours.