Charlotte’s Web is a CBD stock with promise: PI Financial

PI Financial’s Jason Zandberg is sticking with his “Buy” rating for Charlotte’s Web Holdings (Charlotte’s Web Holdings Stock Quote, Chart, News TSX:CWEB) ahead of the company’s quarterly earnings due Thursday.

In an update to clients Wednesday, Zandberg said that regulatory issues in the US CBD sector along with COVID-19 sales declines are likely to bring down CWEB’s quarterly numbers.

Boulder, Colorado-based Charlotte’s Web is a maker of hemp-derived CBD (cannabidiol) wellness products with sales through distributors and retailers along with direct-to-consumer online sales.

The company did well in last reported quarter, Q4 of 2019 delivered on March 24. There CWEB posted organic revenue growth of 6.0 per cent year-over-year to $22.8 million and an adjusted EBITDA loss of $10.2 million. The company ended 2019 with 36 per cent organic revenue growth for the year and an adjusted EBITDA loss of $1.7 million. (All figures in US dollars except where noted otherwise.)

2019 was a major year for CWEB as it was for a number of US cannabis names, with the company notching over 10,000 retail locations across the country selling its products and harvesting 2.34 million lbs of biomass, a 245-per-cent increase over the previous year.

Subsequent to the year’s end, CWEB announced the acquisition of Abacus Health, an over-the-counter topical cannabis medication company, with the $99-million deal expected to close in the second or third quarter of this year.

Zandberg said because CWEB sells its products through a retail channel (which would have been shut down by the end of the first quarter 2020, he expects sales to be down for the Q1, although CWEB has picked up its direct-to-consumer game, which the analyst expects will make up about 75 per cent of its sales for the Q1.

The analyst is calling for first quarter revenue of $20.5 million, down ten per cent from the Q4 and down six per cent year-over-year. For EBITDA, Zandberg is forecasting a loss of $9.0 million compared to a loss of $10.2 million in the Q4 2019 and a loss of $4.4 million for 2019.

For comparison’s sake, Zandberg pointed to CV Sciences which reported “dreadful” results for its Q1, according to the analyst. The CBD company had attributed its 13 per cent sequential revenue drop to COVID-19, but Zandberg also feels regulatory delays and intense competition in the US CBD space are playing a role.

Of CWEB’s Q1, Zandberg said, “We expect a recovery in gross margins in Q1 to 66 per cent with a path to reach the historical average. We believe that increasing scale will improve future gross margins but a bigger factor may a reduction of the competitive landscape due increasing regulations or as desperate competitors run out of money.”

For the year, the analyst is calling for revenue of $113.1 million and EBITDA of negative $16.0 million.

With his “Buy” rating, Zandberg also held onto his 12-month price target of $10.00, which at press time represented a projected return of 70 per cent.