Cannabis company insights

A look at the leaders of the cannabis industry, how they compare to one another and how they’re positioned around recreational and medicinal segments of the market

Ruth Saldanha 11 July, 2019 | 3:05PM

 

 

Note: This video is part of Morningstar Canada's Cannabis Week Special Report

Ruth Saldanha: Continuing our cannabis week coverage, Morningstar equity analyst Kris Inton is here with us to talk about the companies that he covers.

Kris, what are some of the Canadian companies you cover and how do you compare them?

Kristoffer Inton: So, we cover Canopy Growth, Aurora Cannabis, Tilray and Cronos. And so, I would probably consider Canopy Growth to be one of the most forward of the Canadian companies. They have a huge strategic investment from the large alcohol producer Constellation Brands. And Canopy seems very focused on developing the consumer products side of cannabis. And so, a big part of the partnership with Constellation is developing cannabis-infused drinks. And I think that that part of the markets, edibles and drinks, is probably going to be very big in the future. And Canopy wants to be that company that's big in the consumer-packaged cannabis space.

Aurora Cannabis is a little bit different. Aurora Cannabis seems very much focused, in our view, on being the low-cost producer. They are very focused on building high-tech as much as automation as possible in their facilities and trying to be the lowest cost producer. Of the four Canadian companies we cover, it's actually the one that's lacking a strategic partner right now, although they are still looking for their big major investment.

The next one is Tilray. And so, Tilray has some partnerships with some pharma companies as well as the big alcohol producer AB InBev. So, Tilray, we see kind of playing its options. So, with AB InBev it's doing the same as Constellation, trying to develop its consumer products and then with some partnerships with some pharma companies it's also trying to produce, looking to expanding its medical offering.

And then, lastly, Cronos, we think is very focused on just growing its production. It's one of the smaller of the major Canadian cannabis companies from production size. And so, we see it focused on ramping up the size of its production capacity. Their major strategic partner is the tobacco company Altria. And so, we think that Altria can help them navigate what's a very strict regulatory environment that's similar to what they would see in tobacco, but that there's probably less product synergy than what we see with the alcohol partnerships.

Saldanha: These companies are producers and distributors across both medical and recreational use. What's the current market size differential between medical and recreational cannabis and how do you see this changing over time?

Inton: So, right now, it's almost mostly medical cannabis and that's simply to reflect the fact that the Canadian recreational laws only passed late in 2018 and that the distribution is still expanding at this point. But in the future, we expect the recreational market to far outweigh the medical market.

Saldanha: What companies under your coverage give investor the most U.S. exposure and how do you compare those?

Inton: There's three companies that we cover that give investors huge U.S. exposure. The first one is the Canadian producer Canopy. With their agreement with Acreage Holdings they are set to Acreage immediately upon a change at the federal level. So, when the U.S. government either legalizes fully or just lets states decide, Canopy will immediately get U.S. exposure through that acquisition of Acreage.

We also cover Curaleaf, which is a U.S. pure-play company. They operate cultivation, processing and dispensaries on both coasts. And so, from an investment exposure, it gives investors a pure U.S. exposure.

And lastly, we have Scotts Miracle-Gro. And so, Scotts Miracle-Gro is interesting and very different than the other companies we cover. Right now, the cannabis exposure is relatively low. But by 2030, we think that about 30% of its operating profit will come through cannabis. And this is probably a unique way to invest in cannabis, because it doesn't "touch the plant." What's Scotts is doing is selling equipment and different supplies that the cultivators need in order to grow cannabis. And so, it will see growth as a derivative of the growth in the cannabis industry. So, investors do get to enjoy that cannabis growth but not actually having to touch the plant directly.

Saldanha: Thank you, Kris. For Morningstar, I'm Ruth Saldanha.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Acreage Holdings Inc Ordinary Shares (Sub Voting)3.62 CAD-8.37
Aurora Cannabis Inc2.34 USD2.63
Canopy Growth Corp20.31 CAD8.15
Cronos Group Inc6.70 USD9.12
Curaleaf Holdings Inc7.30 CAD-5.81
Tilray Inc19.98 USD0.35

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca