It's a change of pace for short-seller Andrew Left's Citron Research, which has been shorting (and scrapping with) a number of cannabis companies, such as Cronos Group Inc (NASDAQ:CRON) and Namaste Technologies Inc (CVE:N, OTCQB:NXTTF).
"Yesterday’s report that Altria is in talks to buy a stake in Aphria shows the maturation of legacy tobacco. PYX to be the greatest beneficiary," said the report.
The North Carolina-based company offers products in the leaf tobacco, e-Liquids, industrial hemp and legal cannabis industries.
READ: Tobacco player Alliance One International turns over a new (and greener) leaf as Pyxus International
Citron Research highlighted the company’s strong management team and tight float.
"The board of directors is particularly impressive at Pyxus as it is stacked with agriculture and tobacco pedigree," wrote analysts at Citron.
Citron said Pyxus is unlikely to have "execution risk" because it knows how to operate a successful business.
"What we think is interesting about PYX is that the legacy tobacco business is covered by the current valuation and as an investor, you get free upside on a real cannabis business," wrote the analysts.
"Put another way, assuming Pyxus' legacy tobacco business is worth $500 million (which covers the debt and half the equity when you remove inventory and AR), the cannabis opportunity is only valued at about $150 million. Given yesterday’s news, this makes the risk/reward for Pyxus very compelling especially as Altria gets involved with Aphria formally at a $5 billion valuation or you can instead by this call option in Pyxus," they added.
Citron said it was short many names in the Canadian cannabis space, but believed that Pyxus is a "perfect hedge" as the company has a "solid underlying business" that has value.
"In the last 12 months, Canopy Growth Corp, Tilray Inc, and Cronos Group Inc have generated slightly over $100 million in combined revenue while Pyxus alone generated almost $2 billion. Despite this large discrepancy, Pyxus only has a market cap of about $350 million while the others each have multi-billion-dollar valuations," wrote the analysts.
"As of 6/30/18, adjusted net debt was $709 million (debt minus cash minus seasonal borrowings supported by committed inventory), so enterprise value is only about $1 billion," they added.
The tobacco company’s Canadian subsidiary recently received a cannabis cultivation license from Health Canada. Pyxus also owns majority stakes in two Canadian licensed cannabis producers.
Shares of Pyxus were up 10.9% midday at $44.42
Contact Katie Lewis at [email protected]
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-- Updates with new quotes from Citron report --
-- Uttara Choudhury contributed to this report --