Charlotte's Web Holdings (CWBHF) has been one of the few cannabis companies in the world that has been not only able to consistently grow revenue, but do so at a profit.
The company competes in the hemp-based cannabidiol (CBD) extracts and products segment of the cannabis market.
Up until about a month ago, my thesis was that the market would reward cannabis companies that generated the most revenue. While that remains true, it's becoming evident to me that cannabis companies that are able to increase revenue at a significant pace while lowering costs and generating positive earnings, are going to start to get the strongest bid from the market.
This is one of the reasons I see Aurora Cannabis starting to become more favorable to the market than Canopy Growth, which has continued to grow revenue, but at a huge loss; in its latest quarter it lost over $74 million.
Charlotte's Web has already started to produce earnings, and it's likely that will continue for the foreseeable future.
In its latest earnings report the company took a tumble, primarily I think from the market in general become more risk averse, and second, its earnings per share missing slightly.
Revenue in the reporting period was $21.7 million, in-line with expectations, while EPS was $0.02, missing by $0.01.
Revenue was up 66 percent year-over-year, and gross profit jumped by 53 percent. Where I think some of the negative sentiment came from in its performance itself, was with its earnings before taxes, where it dropped 27 percent. Net income was also down by 26 percent.
The company guided for revenue to increase at a pace quicker than costs for the remainder of 2019, meaning it should be able to boost sales at a profit. That suggests the company will continue to maintain positive earnings going forward.
In 2019 earnings is expected to reach 33 cents per share, and in 2020 the company guides for earnings per share of 75 cents.
A little over 50 percent of revenue in the reporting period came from over 6,000 retail stores, with the remainder primarily coming from its fast-growing e-commerce business.
Revenue for 2019 is projected to be around $142.9 million, according to the company, and in 2020 that's expected to more than double to over $300 million.
One concern I do have concerning revenue is the guidance for 2019, which is projected to be in a range of $120 million and $170 million. The problem to me is there should be such a wide number between the revenue floor and ceiling. It makes me think the company sees something potentially on the down side that could disrupt sales flow. It's possible it could be the timing of the harvests and the amount of time it has to sell through during 2019.
Planted acreage increasing
To get an idea of how quickly Charlotte’s Web Holdings has been increasing the amount of acreage it plants, in 2017 it planted only 70 acres of hemp, which produced a harvest of 63,000 pounds. It followed that in 2018 with a total of 300 acres planted, producing a harvest of 675,000 pounds.
Earlier in the year the company stated it was going to boost its planted acreage to 700 acres, but in mid-June upwardly adjusted that to 862 acres. Assuming a similar yield per acre, that will easily more than double its output in 2019.
Investors should be able to count on well over 1 million pounds of hemp to be grown this year.
Also of interest, is of the 862 acres being planted, about 53 percent of them are certified organic. Management has said it plans on increasing the percentage of organically certified hemp in the years ahead. That would boost margins and earnings.
The recent sell-off of the stock as a result of the uncertainty surround the trade wars and the earnings before taxes and net income both dropping. This pushed the share price down to under $12.00 per share.
But even now the company is trading at under $15.00 per share, and with the projected acreage and revenue outlook, a couple of analysts have the company almost doubling, or more than doubling its share price from these levels. I think they're close to the mark.
Not long ago, Charlotte's Web started shipping product to three major retail brands in the U.S., and that should boost its own brand awareness and popularity among customers.
With CBD sales expected to explode over the next three years, I'm not aware of any company better positioned than Charlotte's Web to take advantage of it.
Investors need to take a quick look at this stock before it starts to take off once again. This is a very good entry point if you believe in the narrative surrounding the future performance of the company.
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