Is Cronos Group a buy?

Patience should soon reward investors in Cronos Group (Cronos Group Stock Quote, Chart, News, Analysts, Financials TSX:CRON), says Raymond James analyst Rahul Sarugaser, who updated clients on the company on Monday. Sarugaser said he likes the cannabis company’s strategic move in the US cannabis space.

Canadian licensed producer Cronos Group on Monday announced that it had purchased an option to acquire a 10.5 per cent equity stake in PharmaCann, a privately-owned US multi-state cannabis operator (MSO) for $110.4 million. PharmaCann has six production facilities and 23 dispensaries across six states: New York, Illinois, Ohio, Maryland, Pennsylvania and Massachusetts.

Cronos, which has a partnership with international CPG and tobacco company Altria through a multi-billion dollar investment by Altria, said its option in PharmaCann may be exercised upon satisfaction of a set of factors, one of which is the status of US federal cannabis legalization. The transaction has been approved by the PharmaCann board of directors and the requisite PharmaCann shareholders, according to a press release, along with having been approved by Cronos’ board except for executive chairman Michael Gorenstein and director Jason Adler who each hold an indirect interest in PharmaCann by way of cannabis investor Gotham Green Partners.

Cronos CEO and president Kurt Schmidt said his company was attracted to PharmaCann because of their disciplined capital allocation, strong track record as well as its compelling licensed manufacturing and retail footprint.

“Our U.S. growth strategy focuses on delivering long term shareholder value by assembling a best-in-class brand and intellectual property portfolio and positioning to deploy our products in the U.S. market through investments and opportunities with U.S. leaders who share our vision and commitment to responsibly distributing disruptive cannabinoid products that improve people’s lives,” said Schmidt in a press release.

Looking at the deal, Sarugaser compared it to one struck between Canadian LP Canopy Growth and US company Acreage Holdings, first announced in April 2019, both of which seemingly hinge on movement on cannabis at the federal level in the US. But where Canopy’s move was clearly a takeover plan Cronos’ with PharmaCann is more of a strategic investment. Sarugaser said in the two years between deals Cronos has gained “valuable perspective” on the evolution of US politics and the US cannabis market.

“CRON indicates that investments like these position the company well to deploy its disruptive cannabinoid products into the U.S. market,” Sarugaser wrote. “PharmaCann’s vertically integrated structure and large retail footprint in limited-license states, in our view, makes this a wise investment for CRON as it proceeds steadily into the U.S. market.”

Sarugaser also noted the new event comes on the heels of Cronos’ June 4 announcement that it is accelerating its cannabis biosynthesis program with Ginkgo Bioworks, with commercialization of cannabinoids-by-fermentation likely to arrive ahead of September of this year, which was CRON’s previous target. Sarugaser speculated that Cronos’ non-THC cultured cannabinoids such as CBG could one day end up on the shelves of PharmaCann dispensaries.

“Following a long period of CRON (and its investors) exercising patience as global cannabis markets matured and as U.S. legislative tides began to turn, CRON seems to be turning up the heat,” Sarugaser wrote.

“With the company proceeding quickly toward the commercialization of cultured cannabinoids, and with today’s first true step into the U.S. cannabis market (beyond CBD)— though, still an option; patience is a virtue—we believe CRON is beginning to rev up the massive CRON-Altria-Ginkgo marketing machine,” he said.

With the update, Sarugaser maintained his “Outperform 2” rating for CRON.

Cronos’ share price rose and fell pretty much in line with the industry as a whole over the past 12 months, with the stock going from a low of $6.21 in mid-March of last year to as high as $19 by early February 2021. Since then the stock has dropped and is currently trading around $10-$11.

Cronos last reported quarterly earnings in early May where its Q1 featured net revenue up 50 per cent to $12.6 million and an adjusted EBITDA loss of $37.1 million compared to a loss of also $37.1 million a year earlier. Cronos finished the first quarter with cash and equivalents of $1.024 billion compared to $1.128 billion a year earlier.

Those results followed on a 2020 where the company saw revenue climb to $46.7 million for the year, aided by growth in the Canadian adult-use market, growth in the company’s US segment including its hemp products company Redwood and rising sales in CRON’s Israeli medical cannabis market.

“In the first quarter of 2021 our results in Canada were impacted by market dynamics due to the COVID-19 pandemic and ensuing stay-at-home orders and various other restrictions. Despite this, we continued to push forward our innovation pipeline and execute on our strategy, which was a true testament to the strength of our team,” said Schmidt in a first quarter 2021 press release.