report that tobacco giant Altria Group Inc. (MO) might be keen to buy a stake in marijuana firm Aphria Inc. (APH) has sparked conflicting views from analysts about the benefits of tobacco companies expanding their businesses.

In a research note, published shortly after Aphria dismissed claims that it had signed a deal with the holding company of Philip Morris USA, Stifels Christopher Growe wrote that tobacco companies have been wise to avoid investing in Canadian pot producers.

According to Barron’s, the analyst said that leading marijuana companies are too expensive, trading on an aggregate enterprise value of around $60 billion Canadian dollars, even though their addressable market will be worth just $5 billion Canadian dollars when recreational cannabis becomes legal in Canada Oct. 17. Growe also repeated Philip Morris International Inc.’s (PM) warning about the potential “reputational risk” of entering the marijuana sector. 

Bull Versus Bear

Citron Research reached a different conclusion. In a separate research note, the short-seller wrote there’s a lot to like about tobacco firms operating in the marijuana space. Altria’s reported interest in Aphria shows the maturation of legacy tobacco, Citron analysts said, adding that such a move would benefit Pyxus International Inc. (PYX), the 145-year-old tobacco supplier that is one of the first in the sector to branch out into pot.

Citron, which has questioned the performance of cannabis stocks Cronos Group Inc. (CRON), India Globalization Capital Inc. (IGC) and Tilray Inc. (TLRY) in recent weeks, described Pyxus as the only U.S.-listed marijuana stock with "material upside.” The North Carolina-based tobacco company’s shares have surged since it first entered the marijuana market in February 2018, despite claims that its Canadian pot subsidiary is relatively small, remotely located and has little access to key markets. 

While other analysts short the stock, Citron slapped a $65 price rating on Pyxus, adding that its valuation could double if investors remain on the cannabis bandwagon. In the bullish research note, published on Thursday, Citron analysts praised Pyxus’s hiring of Bryan Mazur, a former executive vice president at Dr Pepper Snapple Group, and commented that the company’s provincial supply agreement and production capacity have been overlooked by the market.

“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. In the last 12 months, CGC [Canopy Growth Corp], TLRY and CRON have generated slightly over $100 million in combined revenue while PYX alone generated almost $2 billion," Citron said. "Despite this large discrepancy, PYX only has a market cap of about $350 million while the others each have multibillion-dollar valuations."

"There are currently four times as many smokers as cannabis users in the world. However - particularly in developed markets - use of cannabis is soaring while tobacco use plummets," Euromonitor International had said in a 2017 report. "The tobacco industry must secure future revenue streams and legal cannabis offers a legitimate opportunity."

Pyxus shares rose 10.1% in pre-market trading. They also climbed 4.09% during Thursday’s session, a day when most other cannabis stocks saw their valuations slide.