Cash Is King

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Only in the world of Big Cannabis can a company deliver 200 percent revenue growth and still suffer on Wall Street. However, that’s exactly what’s going on with Cronos Group Inc. (NASDAQ:CRON).

The sales ramp is alive and well here. The company already has put together enough cultivation capacity to support exponential expansion through at least 2022.

But the problem is that even in that scenario, the top line will soar from the equivalent of $7.5 million a quarter now all the way to $140 million three years from now. Meanwhile, simply adjusting the balance sheet has created a $200 million paper windfall.

In other words, companies like CRON are still just a sliver of cannabis and a slab of cash. What they do with the cash will be interesting, but they’re going to need to build a lot of greenhouses to convert balance sheet assets into an actual sustainable sales profile.

I think that’s what spooked Wall Street this week. Even though CRON shocked us by reporting the equivalent of a $0.17 per-share profit, anyone who looks past the headline can see that $190 million in income doesn’t come naturally out of $7 million in revenue.

After all, this is supposedly a commodity business, no matter how hard CRON works to move up the value chain with rare cannabinoids for pharmaceutical research or CBD-infused vape oils. Margins are supposed to be narrow.

Either way, it strains credibility for an operating company to book more profit than it produces in revenues. The sheer scale of the disconnect here was apparently an uncomfortable truth for some people.

Personally, I don’t mind the reminder that CRON has close to $1.2 billion in the bank waiting to deploy. It’s not a farmer. It’s an incubator and practically a cannabis-focused venture capital fund.

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On that basis, the stock can be exciting at the right price. Strategic shareholder Altria Group Inc. (NYSE:MO) already got a good deal here, paying the equivalent of $12.30 per share for up to 55 percent control of the company.

That stake is now worth 10 percent more since the deal was announced on Dec. 7. Ironically enough, reevaluating warrants for MO to acquire even more stock was what triggered the windfall “profit” in the first place.

Until MO exercises those warrants, the stock’s value will ebb and flow. The warrants were worth $200 million more at the end of March. Three months from now, they may recover, at which point CRON will need to book them as a liability and take last quarter’s paper profit away.

In the meantime, MO has learned that this is a great place to park a lot of cash. The cannabis operation itself is starting to get traction. There’s plenty of room in the greenhouse and what amounts to trial cultivation isn’t burning a lot of money.

When CRON scales that cultivation a little higher, we’ll consider it for the Turbo Trader Marijuana Millionaire Portfolio. For now, however, cash is cash and cannabis is cannabis. CRON has too much cash to count as a cannabis company in my book.

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