Piper Jaffray Initiates Coverage Of Cronos, Says Stock 'Warrants A Premium Valuation'

Cannabis stocks got a boost on Tuesday after a major Wall Street firm initiated bullish coverage of Cronos Group Inc CRON.

The Analyst

Piper Jaffray analyst Michael Lavery initiated coverage of Cronos with an Overweight rating and $18 price target.

The Thesis

Lavery said Cronos is well positioned for years of strong top-line growth as the cannabis industry expands over time. He also said the partnership with Altria Group Inc MO has tremendous advantages from Cronos. In addition to providing access to 230,000 U.S. retail locations, Altria has much-needed legal and regulatory expertise.

“We expect Cronos to have modest near-term revenues from Canadian cannabis production, but believe it has significant potential growth opportunities with CBD products in the US, including through its pending acquisition of the Lord Jones brand,” Lavery wrote in a note.

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Lavery said Cronos will likely utilize its $1.8 billion in capital from the Altria deal to launch a U.S. CBD business within the next year, potentially targeting vapes and topicals. He is projecting CBD will account for 60% of Cronos revenue in 2020.

Today, Piper Jaffray estimates the global legal cannabis market is valued at between $15 billion and $50 billion, but Lavery said that value could grow to between $250 billion and $500 billion over time. Medicinal cannabis should gain share from prescription pain killers, sleep aids and other drugs.

While Cronos shares are richly valued, Lavery said its growth potential and access to capital and U.S. retail warrant a premium valuation.

Price Action

Cronos shares traded higher by 4% to $13.75 at time of publication. Lavery also initiated coverage on other cannabis stocks:

• Aurora Cannabis ACB with a Neutral rating, $7 price target
• Cresco Labs CRLBF with a Overweight rating, $11 price target
• CV Sciences CVSI with a Overweight rating, $5 price target