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Stone Fox Capital
Marketplace Charlotte's Web: Good Days Ahead
Mar. 30, 2021 8:29 AM Summary
Charlotte's Web posted solid Q4 growth despite FDA guidelines holding back the CBD market.
The CBD specialist has several catalysts for growth in the years ahead, outside of domestic CBD sales.
The stock is cheap with a market valuation of $700 million, but investors should buy on dips due to FDA uncertainty.
The market leader in the cannabidiol (CBD) space remains a stock to watch during a difficult regulatory period. Charlotte's Web Holdings (OTCQX:CWBHF) had a difficult 2020, but the company is poised to grow when the FDA finally sets guidelines surrounding CBD in dietary products. My investment thesis remains very bullish on the stock, especially on regulatory delay induced dips. Growing Despite FDA
Acquiring Abacus Health last year has helped the quarterly results, but the key is that CWBHF is positioned for success once the FDA provides new guidelines. The company now has 22,000 retail doors after adding another 1,100 in the last quarter.
For Q4, revenue reached a record high at $26.9 million. The numbers offered limited growth going all the way back to Q4 in 2019 when revenues hit $21.5 million. The revenue amount was up 7% sequentially from $25.2 million in the prior quarter as more consumers ordered online, but the main gain came from some retail and health practitioners reopening businesses.
CWBHF now has a $100+ million annualized revenue run rate which is virtually EBITDA breakeven. For Q4, the adjusted EBITDA loss was only $2.1 million due to a 62% gross margin and cost controls.
The company lowered annualized operating expenses by $10 million in order to keep expenses in line with revenues here all while absorbing Abacus Health into the business. In addition, CWBHF opened up a new 137,000 sq. ft. facility to increase production capacity ahead of anticipated growth from updated FDA guidelines expected this year. Big Days Ahead
The quarterly revenue levels are major disappointments for a company, when combined with Abacus Health, were once expected to generate over $100 million in quarterly revenues, or $400 million annually, by now. Though, investors need to remember that Charlotte's Web is better positioned now after expanding operations in 2020 adding the new production facility to meet expected f/d/m channel demand.
Speaking of the FDA, the company contributed to the Federal Bill H.R. 841 recently reintroduced by the House. The bill would legislate hemp derivative products as dietary supplements and allow the FDA to issue regulations in support of hemp-infused food products allowing the f/d/m channel to safely sell such products.
The company didn't provide guidance for 2021, but the CFO was quick to point out the Brightfield Group prediction for CBD sales to grow 29.3% for the year. CWBHF reported 2020 revenue of $95.2 million leading to a target of $123.1 million for this year. The number isn't completely comparable due to not including Abacus Health numbers for the full year. A forecast closer to $130 million would be equivalent to where the combined company would grow by nearly 30% this year.
The one good aspect of the FDA inaction and COVID-19 shutdowns is a dramatic reduction in competition in the CBD space. CWBHF has seen CBD brands once listed above 6,500 drop to less than 2,500 in their competitive space. Naturally, those amounts are still far too high, but the company has seen the vast majority of legitimate competitors dip to only a handful in major retail channels.
Per CEO Deanie Elsner on the Q4 earnings call:
So the culling has taken place. We are seeing continued heavily fragmented consolidation of the leaders. And here are some amazing numbers. In the food, drug and mass channel, there's 115 different competitors competing today. 7 of them represent 65% of the retail sales in the latest 4 weeks. And so as these smaller players drop out, you're going to see even more momentum shift to those bigger players. In natural, the numbers are even more compelling and natural is about 306 different competitors on any given day. And 5 competitors generate about half of the sales.
A couple of big growth drivers going forward are international sales and an entry into cannabis wellness. CWBHF recently entered Israel via a partnership with Canndoc and the company has sights on other locations such the U.K. and Canada. Management hasn't provided any financial projections from the international expansion.
The other opportunity is the cannabis wellness space with the optionality of buying The Stanley Brothers business on federal legalization. Due to a related party transaction, the market probably won't factor this deal much into the valuation. CWBHF is paying $8 million for the option
to acquire the cannabis wellness business at a reasonable price of 3.5x revenue and 13.5x EBITDA multiples. Takeaway
The key investor takeaway is that CWBHF has a fully diluted market cap near $700 million. The stock appears fairly valued or even expensive based on the current revenue run rate, but FDA guidelines on CBD will provide a massive boost to revenue. CWBHF is poised to rally on any FDA action and additional catalysts, so investors should definitely look to load up on weakness this year.