Despite ongoing murkiness in the US CBD market, stocks like Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON) should get a boost from Aurora Cannabis’ breakthrough deal to purchase a major US CBD company.
That’s according to analyst Rahul Sarugaser from Raymond James who reviewed the current state of affairs in an update to clients on Thursday where he reiterated his “Market Perform 3” rating for Cronos.
Edmonton-based Aurora Cannabis made a splash this week with the purchase of US CBD company Reliva for $40 million in stock and the potential for $45 million in cash and/or stock earnouts over the next two years. (All figures in US dollars.)
Reliva has about 20 products (topicals, gummies, drink powders and creams) currently being distributed through about 20,000 convenience stores across the US. Aurora indicated that Reliva’s revenue run rate is $14 million and that the company has been EBITDA-positive for the last 12 months, with no debt and a capital-light structure. As such Aurora sees Reliva as being an immediately accretive pickup.
In his update, Sarugaser said the Reliva deal puts Aurora ahead of its Canadian peers such as Cronos and Canopy Growth in terms of penetration into the US CBD market. The analyst pointed to the other notable recent move in the space, Cronos’ decision (in conjunction with tobacco partner Altira) to shelve its Peace+ CBD brand, planned for entry into the US market, due to the uncertain regulatory environment in the US around CBD at the federal level.
The Aurora deal will be a likely near-term lift to the fortunes of cannabis companies, the Sarugaser said.
“While we reserve any speculation on how accretive this deal might prove to be for ACB, if at all, we will suggest—if history is any guide—that deals like this tend to provide a halo effect on the entire cannabis sector. As such, we wouldn’t be surprised to see upward momentum in all the bellwether Canadian LP stocks,” Sarugaser wrote.
While many individual states have legalized cannabis in either medical or recreational form, the United States still considers it a Schedule 1 prohibited drug at the federal level. On the CBD side, the US removed hemp-derived products from Schedule 1 status but the ground remains unclear for CBD topical and ingested products which are still in a legal grey area, despite the fact that companies have already sprung into action in the production and distribution of CBD products, ostensibly on the assumption that the US FDA will soon make a ruling in favour of CBD sales.
Sarugaser said US regulators have been issuing warning letters to violators of current laws related to CBD, making the territory a tough sell for companies like Altria and Cronos.
“For the moment and the foreseeable future, inclusion of CBD in any marketed edible product appears to be something that would put you on regulators’ radar, and, we speculate that the FDA would be pleased to make an example of a large Canadian interloper. (Note: Reliva sells CBD gummies and drink powders),” Sarugaser wrote.
“CRON with Altria, in our estimation, has the time, expertise, and balance sheet to wait for clear guidelines to be issued by the FDA, and, once the coast is clear, CRON has the firepower to dominate the US CBD market,” he wrote.