Cronos Group (NASDAQ:CRON) stock fell 5.2% on Sept. 9 as a result of investors’ concerns about the cannabis company’s focus on vaping products. Those offerings have come under severe scrutiny in recent weeks, due to the death of six people from lung disease related to their use.
Cronos isn’t the only cannabis company to have a vested interest in the success of vaping pens, but at the moment, it appears to be the biggest player taking it on the chin as a result of the recent health scare.
If you own CRON stock, now is the time to be thankful that Altria (NYSE:MO) owns 45% of the cannabis company, with an option to buy an additional 10% in the future.
Here are three reasons why that’s the case.
Altria Understands Lungs Better Than Most
Who would have more knowledge about how our lungs operate than a company whose products are directly responsible for harming them?
Altria would not have made a $12.8 billion investment in Juul Labs or a $1.8 billion investment in CRON stock if it didn’t understand the health risks associated with vaping. MO has been down this road many times with cigarettes.
The fact that President Trump and his administration are trying to crack down on the sale of flavored e-cigarettes, while understandable, isn’t really crucial for CRON stock.
According to the Center for Disease Control and Prevention, 480,000 Americans die each year due to smoking. That’s a staggering amount. However, we haven’t seen cigarettes outlawed as a result of that sad situation.
In fact, the FDA is currently trying to ban the sale of menthol cigarettes, but the tobacco companies will continue to fight the agency’s legal efforts for years to come. Flavored e-cigarettes will likely take a long time to ban.
The reality is that Altria understands what’s at stake when it comes to vaping and e-cigarettes. They, along with the rest of the industry, are not going to go quietly into the night.
Remember, the NRA isn’t the only trade group in the U.S. with a powerful lobby.
CRON Stock and a Potential Merger
In recent weeks, Altria’s been negotiating with Philip Morris International (NYSE:PM), the owners of the Marlboro brand outside the U.S., to reunite after 11 years as separate companies.
Last October, before Altria bought up a big chunk of CRON stock, I suggested that Philip Morris should make a play for one of Canada’s big cannabis companies.
“The tobacco companies were born to manufacture and sell the various by-products of the cannabis plant which includes marijuana and hemp,” I wrote at the time. “The fact that only now are they considering a move — after legalization in Canada — suggests they’ve been irreparably scarred by years of tobacco litigation.”
Cowen & Co. analyst Vivien Azer recently suggested that the crackdown on vaping flavoring might be the nudge CRON and MO needed to officially tie the knot.
After an acquisition, CRON would be controlled by a company with $54.7 billion pf annual revenue and $14.3 billion in free cash flow, providing it with plenty of capital to fight any potential opposition to cannabis vaping in the future.
Altria Has a Beverage Unit
Cronos isn’t the only cannabis company with a big focus on vaping. Aurora Cannabis (NYSE:ACB) is focusing on vape pens and edibles while ignoring cannabis beverages.
I believe that’s a mistake. Perhaps not a lethal one, but a mistake nonetheless. The older people get, the less they want to be messing with their lungs,. That’s why I think cannabis-infused drinks will win in the end.
Altria, although not nearly as involved in the alcoholic beverages industry as it once was, still owns premium wine producer Ste Michelle Wine Estates. In addition, as a result of Anheuser-Busch’s (NYSE:BUD) $100-billion acquisition of SABMiller in 2016, Altria owns 10% of BUD stock.
It’s hard to imagine Budweiser turning down an opportunity to partner with Atria and Cronos to produce cannabis-infused drinks on a global basis.
As long as Altria continues to own a big chunk of Cronos Group stock, I don’t think investors need to overreact to the latest health concerns surrounding vaping.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.