What Is Cronos Group Doing To Capitalize On Canada’s Legalization Of Marijuana?

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Canada is moving closer to the legalizing the sale of marijuana for recreational purposes, with the country’s Senate recently voting in favor of new legislation. Canadian marijuana stocks have been soaring over the past year in anticipation of the legalization, as investors are likely anticipating a growth trajectory similar to that of tobacco stocks, such as in Philip Morris’ early days.  Cronos Group (TSE:CRON), a producer of dried cannabis and cannabis oils, saw its stock rise from CAD 1.80 in June 2017 to roughly CAD 9 currently. In this note, we take a look at the steps Cronos is taking to capitalize on Canada’s legalization of marijuana.

View our interactive dashboard analysis which allows users to modify the company’s forward revenues and multiple to arrive at a valuation estimate for the company. We are valuing Cronos group at about CAD 9 per share, or CAD 1.6 billion, which is roughly in line with the market price.

Legalization Will Open Up A Huge Market

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Canada will be the first G7 nation to legalize the use of marijuana by adult consumers for recreational purposes. The revolutionary law could open up a new and extremely lucrative market for cannabis companies in the country. The sales of Canadian marijuana is expected to go up by more than $4 billion during the first year of its legalization [1]. Although there isn’t a definitive date as to when it will be legalized, Cronos has been preparing for the demand growth that would come from the legalization by scaling-up its production capacity.  For instance, the company is scaling up its Peace Naturals indoor facility, while building a greenhouse in Israel and another indoor facility in Australia via a joint venture. While the company only had about 6,650 kg of capacity at the end of last year, it has estimated that its annual production capacity will top 47,000 kgs by early 2019.

Branding will also play a role in the influencing of consumers, as the market expands.  Cronos has been undertaking some re-branding to prepare for the 2018 changes and better distinguish between its medical and recreational platforms, which address different consumer targets. The company is also working with U.S-based company, MedMen, which will help it develop branded products and open stores across Canada for the sale of recreational marijuana, via a joint venture. MedMen is the largest cannabis retail chain in California and the company’s retail expertise could be valuable to Cronos as it addresses new customer groups. 

 

 

 

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Notes:
  1. Legal marijuana could spark a $4 billion industry in Canada, CNN Money []