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Could Juul's Problems Make This an Inevitable Move for Altria?

Altria (NYSE: MO) is facing multiple obstacles right now. The federal government is attempting to reduce nicotine levels in cigarettes in an effort to curb addiction. Plus, it's looking at banning the sale of Juul's e-cigarettes. Altria invested $12.8 billion in Juul in 2018 and has already written down most of that investment. A ban could just make it all the more evident that Altria needs to alter its strategy.

Given these challenges, Altria may need to focus on a different growth opportunity, one that could help unlock more potential for its business. The answer may lie within the cannabis industry.

Could Altria double down on cannabis?

More than three years ago, Altria invested in Canadian-based pot producer Cronos Group (NASDAQ: CRON). It spent $1.8 billion to take a 45% stake in the business, with the potential to increase its ownership (through warrants) to as much as 55%. As of the end of March, Altria's ownership has fallen to 41.7% due to dilution.

Expanding on its position in cannabis could be one way for Altria to reposition its efforts and focus on a different growth avenue. Cronos sells a variety of cannabis products, including vape products, that can help Altria differentiate its business and be less dependent on cigarettes and Juul. It won't happen overnight, as Cronos has only generated $87 million in revenue over the trailing 12 months, which is nowhere near the more than $20 billion Altria reports annually in revenue.

Cronos is undoubtedly waiting for the U.S. cannabis market to open up -- it remains off-limits for the Canadian-based business due to the federal ban on marijuana. However, with more states permitting both medical and recreational use of cannabis, it seems to suggest that legalization could be on the horizon in the future.

Upon legalization, Cronos would be able to enter the U.S. market and quickly grow its revenue. And there's one particularly promising aspect of Cronos' business that could make it an even more exciting investment for Altria.

Cronos may have a path to profitability

One of the downsides of investing in pot stocks is that many of them simply aren't profitable. Cronos is no exception, incurring net losses of $268 million over the past four quarters -- that's more than three times its revenue. High operating expenses coupled with low gross margins can make turning a profit in the sector look like an insurmountable challenge.

However, Cronos is working on a way to change its prospects for long-term profitability. In 2018, it announced an agreement with biotech company Ginkgo Bioworks to create cultured cannabinoids that are made in a lab instead of being grown in a costly facility.

Last year, Cronos launched its first cultured cannabigerolic (CBG) product, Spinach Feelz. While cannabis consumers may be most familiar with tetrahydrocannabinol (THC) and cannabidiol (CBD), Cronos has the potential to create rare cannabinoids through its collaboration with Ginkgo that can bring costs down in the process. Tetrahydrocannabivarin (THCV) is another example of a cannabinoid that possesses some exciting potential. It doesn't have the same psychoactive effects as THC, and it decreases appetite (increased appetite is normally common with cannabis use).

By providing consumers with a wider array of products while also bringing down costs, Cronos could make for an underrated cannabis company to invest in today. And if Altria puts more money behind the business, it may help accelerate Cronos' growth. Although the business remains largely unprofitable today, Cronos' financials could look a lot stronger in the future.

Altria investors shouldn't panic just yet

Shares of Altria have nosedived as of late. In just a month, the stock has gone from gains of more than 10% for the year to being down 11% year to date. But investors should be careful not to overreact just yet. Juul is appealing the government's ruling on banning its e-cigarettes, and legal issues can take time to sort out.

In the end, it may just push Altria to be more aggressive in diversifying its business (e.g., cannabis), which may benefit its shareholders in the long run. Although I wouldn't rush out to buy Altria's stock on the dip, investors should keep a close eye on it to see how the company responds to this adversity and if it announces any changes in strategy.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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