Charlotte’s Web Holdings has price target slashed at PI Financial

Expect regulatory hurdles to clear up soon in the CBD space, according to PI Financial analyst Jason Zandberg, who reviewed Charlotte’s Web Holdings (Charlotte’s Web Holdings Stock Quote, Chart, News TSX:CWEB) in an update to clients on Tuesday, ahead of the company’s upcoming quarterly results.

Charlotte’s Web is a Boulder, Colorado-based producer of cannabidiol (CBD) wellness products.

The company is scheduled to report its fourth quarter fiscal 2019 results next Tuesday, March 24, with Zandberg expecting revenue to be down six per cent sequentially to $23.6 million and EBITDA of $0.4 million compared to $0.6 million in Q3 2019. (All figures in US dollars unless where noted otherwise.)

Zandberg said the majority of CWEB’s revenue should come from its ingestible products but cautioned that regulatory uncertainties still dog the CBD space, which has led to stiffer competition in the grey market.

“The current CBD environment remains challenging as the FDA has yet to provide clarity on the CBD regulations and allowable products. In this unregulated market, there have been low barriers to entry resulting in intense competition. With the crowded market place, consumers are flooded with options from lesser known brands,” Zandberg said.

While cannabis —and thus cannabis-derived THC and CBD— remains a Schedule 1 drug in the United States, the US nonetheless passed its 2018 Farm Bill into law in December 2018, which legalized the industrial production of hemp, effectively opening the gates to hemp-derived CBD products under the federal law. The new legislation ushered in the CBD economy, including topicals and edibles, in the US, even as the
precise status of such products remained unclear.

That status has been a point of debate of late, as the US Food and Drug Administration released a statement in November of last year stating its concern about CBD related to potential harms and unknowns about the compound. That caused a stir in the burgeoning industry, with stocks like CWEB taking further hits in the overall depressed cannabis environment.

Yet there might be light at the end of the tunnel for CBD after all, as the industry picked up on statements made in late February by the FDA’s new commissioner Stephen Hahn, who essentially said that already CBD has found wide usage across the US, and thus, regulators are more than likely to make space for it as a wellness product in short enough order.

Zandberg said the current grey market will eventually be replaced with a regulated economy, one which will be to Charlotte’s Web’s advantage.

“We have revised our FY19 forecasts to reflect the current landscape but have not changed our FY20 and FY21 estimates as we believe the FDA will act soon providing clear guidelines that are likely to eliminate significant competition,” Zandberg said.

The analyst has called for fiscal 2019 revenue of $95.3 million (previously $98.1 million) and EBITDA of $9.1 million (previously $10.6 million).

With the update, Zandberg maintained his “Buy” rating but dropping his target price from C$20.00 to C$11.50, a reduction he said is a reflection of the reset in trading multiples in the cannabis/CBD space.

At press time, the C$11.50 target represented a projected 12-month return of 144 per cent.