Tobacco giant Altria Group Inc. MO is interested in a buyout of Canadian cannabis company Cronos Group, Inc. CRON. Wall Street analysts see Altria and Cronos as a compelling team.
Risk And Reward
Morgan Stanley analyst Pamela Kaufman said Cronos could provide Altria with a much-needed long-term growth source, but Altria investors should expect to pay a steep price for that growth.
“An investment in cannabis could be a means to gain a foothold in the category and learn about the industry, but would likely come at an expensive price given elevated valuations and limited profitability,” Kaufman wrote in a note.
The uncertainty surrounding U.S. cannabis legalization, however, will continue to hold back the valuations of cannabis companies like Cronos given the size of the potential U.S. market, and it will also provide uncertainty for potential buyers like Altria, she said.
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Bank Of America’s Take
Bank of America analyst Lisa Lewandowski said investors should expect limited profitability from cannabis companies like Cronos while the focus remains on growing the Canadian business.
“While we have no knowledge if talks between/MO are taking place, we would note that MO mgmt has stated that it was 'studying' the cannabis market but wouldn’t enter the US market until Federal laws were changed (notable roadblocks include interstate sales limitations and banking laws),” Lewandowski said.
She said there are three reasons why Cronos and Altria could make a good team:
- Growing Cronos in the Canadian market could serve as a "trial run” for Altria ahead of potential U.S. legalization.
- Altria has decades of experience navigating the complicated regulations and controls related to healthcare, taxes, shipping and other legal issues Cronos will be encountering in Canada.
- Altria has a strong track record building brand value, such as its success with Marlboro and Copenhagen.
So far this week, Cronos stock is up 16.2 percent and Altria stock is up 1.3 percent.
Bank of America has a Buy rating and $65 price target for Altria. Morgan Stanley has an Equal-Weight rating and $63 target.
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