Cronos Group Could Fly Ahead

Summary

Cannabis stocks are flying with Canada nearing a legalization date target of October 17th.

Cronos is doing a great job of preparing for the adult-use cannabis industry as the big day nears.

The company is already headed toward profit, recreational cannabis legalization in Canada will serve to speed up the process.

Cronos Group has room to grow.

The cannabis sector has been seeing tremendous gains as of late after news broke that Canada would legalize the plant for adult recreational use. The law is scheduled to take effect on October 17, 2018, and it is opening the door to an entirely new industry. As such, cannabis stocks from Canopy Growth Corporation (CGC) to Tilray (TLRY) are headed up. There is one stock in the sector that I believe is presenting the strongest opportunity as the Canadian adult-use market opens. That company is Cronos Group (CRON).

Cronos Group is a company that’s nearing profits, and I believe that the Canadian market is going to push the company into that territory. Also, comparing supply agreements in the coming-soon industry, Cronos seems to be the clear winner. Although the stock has seen dramatic gains over the past month, I’m expecting to see more of the same as I believe we’ve only reached the tip of the iceberg.

Cronos Group Is Taking A Market That Doesn’t Even Exist Yet By Storm

The Canadian recreational cannabis industry is one that doesn’t quite exist yet. With adult-use cannabis not becoming legal until the October 17th of this year, we’re still about a month and a half away. Regardless of this fact, Cronos is already working to take the market by storm, and their efforts seem to be paying off. Although we’ve seen supply agreements among all three of the names mentioned above, Cronos has entered into more agreements, covering more turf than any other company in the newly-forming industry. Here’s a look at the contracts we’ve seen from each thus far:

Canopy Growth Corporation

So far, Canopy Growth has only announced one supply agreement. The agreement, announced on August 20, 2018, was signed between the company and the Ontario Cannabis store. Under the terms of the agreement, the company’s Tweed brand has successfully listed over 100 cannabis-related SKUs across multiple product formats, including pre-rolled joints, dried flower, oils, and softgel capsules.

Tilray

Tilray has been a bit more productive than Canopy Growth when it comes to Canadian supply agreements. So far, the company has made 2 announcements surrounding supply agreements.

The first announcement was made on August 20, 2018. In the release, Tilray said that it entered into an agreementwith the Ontario Cannabis Retail Corporation. Under the terms of the agreement, the company will provide the cannabis retail store with a wide array of wholesale cannabis products for the adult-use market through its High Park Holdings affiliate.

In the second release, dated August 27, 2018, Tilray announced that it was chosen by the Nova Scotia Liquor Corporation to receive an initial purchase order for adult-use cannabis. As of Monday, Tilray marked the 14th supplier chosen by Nova Scotial Liquor.

Cronos

Finally, we have Cronos. Yes, I’ve saved the best for last. So far, Cronos has only issued one press release surrounding supply agreements in the newly-forming Canadian adult-use cannabis market. However, it’s not about the amount of press releases, it’s about the information contained in the announcements.

On August 21, 2018, Cronos announced a series of supply agreements, showing that the company has been hard at work, tackling the coming recreational industry boom.

In the release, the company said that it has signed multiple supply agreements with both government-operated and private cannabis suppliers across Canada. These agreements will put the company’s products in the Ontario Cannabis Retail Corporation, the BC Liquor Distribution Branch, the Nova Scotia Liquor Corporation and Prince Edward Island Liquor Corporation.

With all of these agreements, in a single press release, the company announced that the provinces covered encompass more than 50% of the Canadian population. Wide-spread reach like this could cement Cronos as a leader in the industry as soon as the industry kicks off.

Cronos Is Inching Into Profit Territory

Digging into the financial data becomes an interesting dive as well. While most companies in the sector are a long way from profits, Cronos is knocking on the door to positive earnings.

In the most recent quarter (Q2, 2018), Cronos reported revenue of C$3.39 million, up from C$643,000 in Q2, 2017. Cost of sales on the revenue came in at C$1.25 million, showing that with growth in sales, there’s plenty of room for profits.

During the second quarter, the company didn’t produce a loss, but profits weren’t there either with earnings per share coming in at $0.00. Considering this, and the fact that cost of revenue is about a third, as sales kick off in Canada, I’m expecting the company to find its way to profits.

Canada Is Big, But The Company Doesn’t Have A Singular Focus

When digging into Cronos, the news surrounding Canada seems to be drowning out some of the other key aspects of the company’s value proposition. One thing that is important to keep in mind here is that the company isn’t one that is stuck in Canda. Cronos operates on a global scale, with subsidiaries and partnerships in six countries around the world. Recently, the company announced the expansion of its involvement in the Australian Medical Cannabis market.

On June 19, 2018, Cronos issued a press release announcing that its Australian subsidiary, Australia Pty Ltd., had been granted a medicinal cannabis Manufacture License by the Australian Office of Drug Control.

As a result of the license, the company is permitted to manufacture cannabinoid based products in the region. This particular license surrounds all forms of extraction, refining, concentration and transformation of the cannabis plant.

One of the most important markets in which the company operates is Israel. The company operates in the region through a joint venture with Kibbutz Gan Shmuel. Through this relationship, its products are exported to 35 countries in Europe and Asia.

Another important factor having to do with the Israeli joint venture has to do with climate. Due to the ideal growing climate in the region, Cronos Israel estimates the cost of producing high quality medical cannabis to be in the range between $0.40 and $0.50 per gram. At these rates, the opportunity for profit is emmense.

The Takeaway

The key takeaway here is that Cronos is a company that is grabbing an emerging industry by the horns. Not only is the company leading the charge when it comes to supply agreements in the coming Canadian adult-use cannabis market, it has also cemented various relationships around the world that will allow for growth. With the company on the verge of profit, and a massive industry opening its doors in just a month and a half, I believe that Cronos represents a potentially incredible opportunity ahead.

Article courtesy of Seeking Alpha

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