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Cronos' emphasis on rare cannabinoids will likely prove valuable for Altria as it looks to diversify from tobacco and into up-and-coming markets like e-cigarettes and marijuana, Cowen analyst Vivien Azer told clients. She has an outperform rating on Altria shares and sees the stock rallying to $74 in the next year. The stock was trading above $53 a share Monday, down less than 1 percent.
"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 roughly 100 cannabinoids, not just THC and CBD," Azer said in a note Monday. "Together, Cronos can leverage Altria's operational capabilities and expertise in order create value-added form factors while focusing on ingredient composition without reliance on a massive cultivation (farming) infrastructure."
Cronos and Altria announced last week that the cigarette giant has agreed to acquire newly issued shares in the cannabis producer valued at $1.8 billion. The transaction represents a 45 percent stake in Cronos at a price of CA$16.25 per share.
The move comes as the long downtrend of U.S. cigarette sales snowballs, forcing big tobacco companies to venture into an area rife with regulatory hurdles but healthier long-term outlook.
"Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria," said Altria CEO Howard Willard. "We believe that Cronos Group's excellent management team has built capabilities necessary to compete globally, and we look forward to helping Cronos Group realize its significant growth potential."
For Altria, the U.S. cigarette market leader, a stake in the fourth most valuable publicly listed marijuana company may seem necessary and prudent. But for Cronos, a check from one of the world's largest tobacco companies is a welcome influx of capital for a handful of companies whose success will likely be defined by their ability to raise cash and scale production.
Canada on Oct. 17 became the first Group of Seven country to allow adult recreational use of pot.
Cronos Group generated $3.8 million in sales in the last quarter driven by medical cannabis sales in Canada and international medical cannabis exports. Though the company boasts the second-highest gross margin of the many young cannabis companies in the last 12 months, Cronos has taken a more modest approach to overseas expansion compared with rivals likes Canopy.
Azer expects that Cronos' international presence is expected to ramp under Altria's guidance, including years of regulatory expertise as well as global business management.
"The proceeds from Altria's investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumers," said Cronos Group CEO Mike Gorenstein. "Altria has decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world."
While cannabis in the U.S. remains federally illegal, the U.S. market opportunity is quite sizable, according to Azer, with the current illicit market valued at around $40 billion to $50 billion. Sixty-six percent of survey respondents now support legalizing marijuana, according to the latest Gallup poll. That's a record high and was the third consecutive year that support for legalization has increased to record levels.
In the 2018 midterm elections, Michiganders chose to authorize the legalization of possession, use and cultivation of marijuana products by those who are at least 21 years old. Ten states and the District of Columbia have now approved recreational use of pot.
WATCH: Six experts on whether the cannabis craze is a boom or bust