Cannabis a Rising Star in Today's Business world - 1

Cannabis a Rising Star in Morningstar Mag
Morningstar Magazine offers insight into future growth potential for cannabis industry and stocks.
By DEBRA BORCHARDT Nov 25, 2019 | 03:20 PM EST
Stocks quotes in this article: CGC, ACB, TLRY, CRON, STZ, BUD, SMG, CURLF, ACRGF
Research company Morningstar released the 2019 winter edition of its Morningstar Magazine and inside revealed big possibilities for the cannabis industry.

Among the findings, was that in about a decade, the cannabis market could expand to $68 billion, and even higher if public and private insurers offer coverage for medical use. Analysts also saw huge untapped potential for the legal recreational and medical use of cannabis and singled out several companies such as Canopy Growth (CGC) , Aurora Cannabis (ACB) , Tilray (TLRY) and Cronos (CRON) for their moves to lower costs by moving production to other countries.

Here are some of the key views on cannabis:

Big Growth Potential
One reason Morningstar may have devoted so much space to cannabis in the publication is that it sees tremendous growth ahead for the industry. Morningstar believes that legal adult-use cannabis has only penetrated 8% of its estimated market and medical marijuana has penetrated only 21% of its projected market. It estimates that the total market will grow to $68 billion by 2030 with 35 million people consuming cannabis. That equates to a demand for 7,000 tons of cannabis annually and is 12-times larger than today.

The analysts also determined that if medical marijuana were covered by Medicare, Medicaid, and private insurance, the market could be in the range of $80 billion to $90 billion by 2030.

Medical Use Getting OK Globally
The analysts noted that the international market for medical marijuana is severely underpenetrated and could grow by 11 times. Exports from Canada could reach $20 billion by 2030 vs. the nearly $4 billion right now.

"We think Canada will struggle to maintain its position as the top exporter as lower-cost producers emerge around the world," read the publication.

Companies Looking Worldwide to Cut Costs
The analysts named Canopy Growth and Aurora Cannabis, which both have five-star ratings, and Tilray and Cronos, which both have a four-star rating, as either planning to move, or already moving, operations in other countries that allow for cheaper production and lower-cost labor.

"We think all four companies will still benefit from widening international medical legalization," it said.

The publication, however, warned that internationally there is a lack of supportive laws and that the stigma against cannabis remains in many countries.

It also singled out Aurora for its focus on clipping costs elsewhere, too.

"Unlike many of its peers, Aurora Cannabis is focused on becoming the low-cost cultivator of the industry by developing advanced automated production," read the publication.

It cautioned, however, that these advances will likely be copied by competitors and that Aurora has yet to receive a big investment from a mainstream powerhouse.

"But for investors who want to invest in the cultivator that leads the way in driving production costs down, we think Aurora is the best option."

U.S. May Turn Over a New Leaf on Legalization
"We expect the U.S. to become the largest cannabis market in the world. We believe, however, that the federal government will eventually let states decide their own cannabis laws," said Morningstar.

The publication picked five-star rated Curaleaf (CURLF) for its pure-play exposure to legalization in the U.S. and Canopy was chosen for its acquisition plans of Acreage Holdings (ACRGF) . Morningstar thinks that the Strengthening the Tenth Amendment Through Entrusting States Act - or STATES Act -- has the most promise, since it has the most bipartisan support.

But this legislation would not legalize cannabis at the federal level, it would only prevent the federal government from interfering with states that have legalized the drug.

More Cannabis-Infused Fun on Way
Morningstar believes there will be significant growth in infused edibles and drink products. The publication sites investments from Constellation Brands (STZ) in Canopy Growth and Anheuser-Busch InBev's (BUD) investment in Tilray. The analysts think that edibles and infused drinks will attract new cannabis consumers that have previously shied away from consuming cannabis.

It's a Miracle: Sober Cannabis Exposure
Of all the ancillary companies now trading in the public markets, Morningstar seemed to play it safe by choosing Scotts Miracle-Gro (SMG) , which only has a three-star rating. While the company is mostly known for its traditional market fertilizers, it has also invested heavily in the hydroponic supply side of its business. The analysts said that they expect 40% of the company profits will come from cannabis by 2028.

"The company holds an estimated market share of 40% to 50% for hydroponic growing equipment," it read.

Smaller World, After All: Consolidation to Continue
The analysts pointed out that venture capitalists are pouring money into the cannabis market with the assumption it will eventually be legalized.

"In just six years, the amount of private capital committed to U.S. cannabis companies has increased a staggering 64 times -- and that's without many conventional exit routes for venture capitalists in sight," said the analysts.

The analysts believe cannabis-related consulting, software and other ancillary companies will become acquisition targets. Lab and strain testing companies could also be attractive.

The average merger and acquisition deal in cannabis has risen to $21.9 million in 2018. Exit transactions have hit record levels, according to Morningstar, having surpassed $2 billion and while that sounds impressive, it pales in comparison to other industries.

"There's a disconnect, then between industry excitement and exit numbers, which won't shoot through the roof without federal legalization," said the publication.

There doesn't seem to be any doubt among the Morningstar analysts that this industry remains in its early days with huge growth ahead. The question seems to be whether today's current cannabis companies can seize opportunities.