The marijuana industry has been an inspiration to investors, with many jumping headfirst into the sector to find the best investment opportunities. One such aggressive mover was Altria Group (NYSE: MO), which decided in December to spend $1.8 billion to take a 45% stake in Cronos Group (NASDAQ: CRON). That transaction closed earlier this month, and now, more people than ever will be looking to see whether Cronos can take maximum advantage of its new capital to grow more effectively.
Cronos shareholders expect to see the cannabis company's latest results on March 26, and they're looking for a massive jump in revenue from the marijuana company for the fourth quarter. Investors will also want to see exactly how it will move forward in its partnership with Altria Group, putting the onus on CEO Mike Gorenstein to justify his vision for Cronos.
Stats on Cronos Group's fourth-quarter earnings
Change from year-ago revenue
Source: S&P Global Market Intelligence.
How Cronos finished 2018
Investors have been patient in watching Cronos grow over the past year. After a strong sequential gain in the first quarter of 2018, sales grew at a much more modest clip in the middle of the year. That's expected to change dramatically in Cronos' fourth-quarter results, which are the first to include the period during which the Canadian recreational cannabis market was open for legal sales.
Cronos wowed investors with its third-quarter financial report in November. In that report, revenue soared by 186% compared to the year-earlier period, seeing a significant rise in several key metrics. Sales volume of cannabis climbed above the 500 kilo mark for the period, with almost 400 kilos of that coming from dry cannabis sales.
Image source: Getty Images.
Yet some pressures on margin showed up as other producers ramped up supply, and Cronos' expenses soared higher as it tried to position its marketing and publicity to take advantage of the impending Canadian rollout. Moreover, even though the report happened several weeks after recreational cannabis sales in Canada began, Gorenstein didn't really take the opportunity to provide much feedback on how the early stages of commercialization were going. That makes the coming report the first real look at how Cronos' business has been doing.
Assessing the Altria partnership
Obviously, the decision to bring on Altria Group as a partner was momentous for Cronos. For Altria, the chance to get involved in the budding cannabis industry was almost a no-brainer, as Altria CEO Howard Willard noted that the marijuana market is attractive and could contribute to growth prospects, which in the mainstream tobacco business have been few and far between. Altria sees great potential for Cronos to expand internationally, and it expects to take advantage of the marijuana company's expertise in both the medical and the recreational markets.
Gorenstein was equally confident that Altria was the right choice for Cronos. The $1.8 billion in capital that Altria contributed should help Cronos grow much more quickly, avoiding the need for dilutive transactions and giving it the opportunity to pay for acquisitions in cash.
Yet most importantly, Gorenstein has established key tenets for Cronos to follow, and he believes that working with Altria should help the cannabis company on all of those fronts. An efficient global production footprint will require the expertise that Altria has in sourcing and distributing tobacco, and although Altria currently has only domestic cigarette distribution networks, its history is global in scope. Moreover, the strength of the Marlboro brand is exactly the kind of brand power that Cronos is seeking, and striving for innovation in producing valuable intellectual property will be vital for Cronos to distinguish itself from its marijuana rivals.
Watch for Cronos to manage expectations
Cronos shares have doubled just since the beginning of 2019, and some investors clearly believe that working with Altria will open up lucrative new possibilities for the cannabis company. Cronos' future does look bright, but long-term investors should hope that Gorenstein and his team work to establish reasonable expectations for the months and years to come. Despite its potential for growth, Cronos will have to be smart about how it executes from a business perspective to take full advantage of its opportunities.
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