PI Financial cuts price target on Charlotte’s Web

Fourth quarter results from US CBD company Charlotte’s Web Holdings (Charlotte’s Web Holdings Stock Quote, Chart, News TSX:CWEB) were a disappointment, according to PI Financial’s Jason Zandberg, who provided an update to clients on Tuesday where he kept his “Buy” rating but lowered his price target from C$11.50 to C$10.00.

Colorado-based CWEB, which makes a number of hemp-derived CBD wellness products including oil tinctures, CBD capsules, topicals and pet products, released its Q4 and year-end results on Tuesday, showing revenue for the year of $94.6 million, up from $69.5-million a year earlier, and an adjusted EBITDA loss of $1.7 million compared to a gain of $19.4 million for 2018. For the fourth quarter, CWEB posted revenue of $22.8 million, up from $21.5 million a year earlier and an adjusted EBITDA loss of $10.2 million compared to a gain of $3.4 million for 2018’s Q4. (All figures in US dollars except where noted otherwise.)

“In 2019 we began a transition from startup to a standup CPG company capable of servicing the mass retail channels,” said Deanie Elsner, CEO, in a press release. “We assembled highly experienced CPG management, sales, and marketing teams that rapidly captured the broadest retail customer footprint in the category.”

Along with the quarterly results, the company announced an agreement to acquire CBD topicals company Abacus Health in an all-stock transaction valued at $69 million.

Elsner said that Abacus, which has distribution with three of the largest US pharmacy chains, puts CWEB as “the most developed CBD company across every channel and segment.”

On the fourth quarter numbers of $22.8 million in revenue and negative $10.2 million in EBITDA, Zandberg was calling for $23.6 million and $0.4 million, respectively. In his update, the analyst noted that direct-to-consumer revenue was up 14 per cent year-over-year while the B2B revenue into the retail channel was down six per cent year-over-year.

Zandberg said the competitive landscape within the CBD market negatively impacted CWEB’s growth rate and that the lack of regulatory clarity on the currently grey market CBD industry in the United States has “created confusion for consumers who are unable to verify the quality or quantity of CBD within each product,” Zandberg wrote.

“Management indicated that Q1 FY20 revenue will be $20.0 million (-12% qoq). We expect the Abacus transaction to close in Q3 which should add $12.7 million in the last two quarters. We do anticipate FY21 should provide good growth as we believe many of the current competition will not survive the near-term economic weakness,” Zandberg wrote.

The analyst has revised his forecasts, calling for fiscal 2020 revenue and EBITDA of $113 million and negative $16 million, respectively, and for fiscal 2021 revenue and EBITDA of $169 million and $28 million, respectively. His target drop, which he chalks up to lowered forward estimates, represented at press time a projected 12-month return of 72.7 per cent.

On the potential for regulatory clarity on CBD’s status emerging from the US Food and Drug Administration, Zandberg said he has not assumed any positive movement in his estimates but that such movement could add upside to his target.