Altria’s investment in Cronos is costing it millions

It’s probably as hard to be a tobacco company as it is to be a cannabis company. One of the largest tobacco companies Altria (NYSE: MO) reported that the total estimated cigarette industry volume fell by 9% in the third quarter of 2024 versus the same period in 2023.

In an effort to diversify, the company invested in Canadian cannabis company Cronos Group (NASDAQ: CRON) to the tune of C$2.4 billion or $1.8 billion for a 45% stake. Altria also had a warrant to increase the ownership to 55%, but it doesn’t look like it has any interest in increasing that stake.

In the third quarter report, Altria told investors that its ownership interest was 41% and comprised 157 million shares. Cronos shares closed at $2.16 on Friday bringing the value of those shares to roughly $496 million. Altria reported that its “Investment in Cronos exceeded its carrying value by approximately $39 million or approximately 13%. On December 31, 2023, the fair value of our investment in Cronos was less than its carrying value by $8 million or approximately 2%.”

Altria also recorded pre-tax losses of $30 million, substantially all of which related to its share of special items recorded by Cronos for the nine months ending September 30, 2023.

Cigarettes facing familiar issues

Where regulated cannabis is facing competition from unregulated hemp products, cigarettes are also facing illicit market products. The company cited the growth of illicit e-vape products and inflationary pressure on consumers. Altria noted that it faces restrictions and requirements on its tobacco products, while the FDA fails to address illicit vape products. The company complained that these vape products are sold at vape shops and online – not unlike the problem facing regulated cannabis. They also state that the illicit vape products appeal to minors because of the sweet flavors that tobacco companies can’t use.

We believe the FDA’s inaction, lack of enforcement and slow pace of smoke-free product authorizations enables bad actors to disregard regulation.

Altria also noted that federal and state governments are missing out on tax revenue by allowing the illicit market to thrive. Altria said it has filed a lawsuit in California regarding the illicit vape companies.

Concerning the cost issues, a pack of cigarettes in New York now costs $16. For a pack-a-day smoker, that becomes a habit costing almost $500 a month. Like the cannabis consumer buying intoxicating hemp products, tobacco customers are seeking cheaper alternatives as well.