Legislative changes are moving cannabis and hemp production out of the grey market in the United States, putting hemp product company Charlotte’s Web Holdings (Charlotte’s Web Holdings Stock Quote, Chart: CSE:CWEB) at the forefront of an enormous paradigm shift, says analyst Damian Karp of M Partners, who in a note to clients last week reiterated his “Buy” rating and C$29.00 target price for CWEB.
Colorado-based Charlotte’s Web Holdings is a vertically integrated hemp company which has industrial hemp production operations in Colorado, Kentucky and Oregon and manufactures and distributes CBD-based wellness products across the US. The company began trading on the Canadian Securities Exchange on August 30 of this year.
Karp says in comparison with its cannabis industry peers pre-legalization, CWEB’s financial performance has been quite strong over the past couple of years, generating year-over-year revenue growth over the first half of 2018 of 87 per cent to $30 million. (All figures in US dollars unless noted otherwise.) Management is forecasting annual revenue of $65 to $80 million in 2018 and $120 to $170 million in 2019, with adjusted EBITDA margins of 35 to 37 per cent.
“In Q1/19 the US Farm Bill is expected to legalize industrial hemp production on a federal level, opening up the entire American market,” says Karp. “As a leader in CBD products and hemp production, Charlotte’s Web should benefit. This could speed up the pace of adoption of CBD-based health and wellness products to replace more traditional pharmaceuticals. The CBD supplements industry is expected to grow at a 55 per cent CAGR to $1.6 billion by 2021 versus over $50 billion for the overall US supplements market.”
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Karp believes that CWEB trades at an unwarranted discount to its Canadian peers, with CWEB 2021 EV/EBITDA at 4x while the comparables in the sector trade at 22x EB/EBITDA.
“With its early-mover advantage and established presence, we believe many consumers new to CBD supplements will choose the trusted Charlotte’s Web brand. Combining this with the expectation of a wider distribution network and innovation pipeline, market share should see a significant uptick in the relatively near future,” says the analyst.
Karp sees CWEB producing revenue and EBITDA in 2019 of $182 million and $67 million, respectively, and revenue and EBITDA in 2020 of $365 million and $138 million, respectively. His C$29.00 target represents a projected return of 209 per cent at the time of publication.