Today Cronos Group Inc. (CRON) announced an initial public offering of its 50/50 joint venture with NewSouthern Capital Pty Ltd. called Cronos Australia. The company is planning to offer 40 million shares in November.
The IPO is anticipated to be priced around AUD$0.50 ($0.34) per share. Cronos Group is expected to own a 31% stake in Cronos Australia, which is estimated to have an initial market cap of AUD$64.4 million.
But will this impact CRON’s U.S. stock price?
To better evaluate this situation, it makes sense to take a step back and look at the big picture.
Cronos Group stock is down 53.9% in the past six months. And most of the company’s Canadian competitors have received downgrades from Wall Street analysts in recent weeks.
However, Cronos is one of the few standouts from the group that did not get downgraded. Bank of America analyst Christopher Carey recently reiterated his “buy” rating with a $16 price target for the stock.
Part of the reason for Carey’s bullishness comes from Cronos Group’s healthy cash reserves. Share dilution has been a concern for many investors in cannabis because many of CRON’s peers have had to dilute their shares in order to raise capital for growth.
By comparison, Cronos Group’s balance sheet is relatively flush with cash ($1.73 billion), representing 53% of the company’s value. Another differentiator is profitability.
In 2018, the company reported a net income of $2.5 million. Meanwhile, competitors Tilray (TLRY) and Canopy Growth (CGC) have yet to be profitable. Similarly, Cronos Group has virtually no goodwill versus its competitor Aurora Cannabis (ACB).
Goodwill is a measure of a company’s intangible assets, and several analysts have argued that at 70%, Aurora’s goodwill is uncomfortably high.
The U.S. CBD Market is opening up
Another strategy that seems to bode well for Cronos Group is its stake in the U.S. CBD market. Carey anticipates that this should offset lower-than-expected sales from the Canadian market as a result of slow retail store expansion and inventory oversupply issues.
Carey predicts that Q3 and Q4 cannabis sales will flatten out in Canada, before rebounding in 2020. But he also believes that CRON has taken a more aggressive stance in the U.S. CBD market than its Canadian competitors.
“Despite [being] domiciled in Canada, it could generate more sales in the U.S. in 2020, per CEO Gorenstein on Q219 earnings,” Carey notes.
Plus, the recent passage of the SAFE banking act in the U.S. House of Representatives signals that the American sea change everyone’s been waiting for may finally be on its way.
The SAFE Act protects banking institutions from Federal prosecution should they provide financial services to cannabis enterprises operating legally at a state level.
MKM Partners analyst Bill Kirk sees this as a win for the cannabis industry.
“This bill, if ultimately passed, would be good for the U.S. cannabis industry, helping provide capital and support services to an industry in need of it and setting federal pro-cannabis momentum,” Kirk noted to investors.
Cronos Group Inc. (CRON) was trading at $8.45 per share on Thursday morning, up $0.05 (+0.60%). Year-to-date, CRON has gained 9.33%, versus a 12.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Eric Bowler
Eric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.