KushCo Holdings (KSHB) stock climbed nearly 4% in Friday's trading session, after the cannabis packaging solutions provider delivered the goods with its fiscal second-quarter results.
The most exciting figure to come out of KushCo's quarterly report was its top-line results. For the quarter, sales were up by 240% from the year-ago quarter to $35.2 million, representing the highest quarterly revenue in history, as well as 39% sequential growth from the fiscal first-quarter. To put this in perspective, the Street has anticipated 2Q revenue of $25.5 million.
But there was one figure that stood out as worrisome for investors -- gross margins. While revenues were well above expectations, gross margins (13%) remained challenged relative to year-ago levels (28%).
Seaport analyst Brett Hundley believes there's nothing to be concerned about as he reiterates a Buy rating on KSHB with a $10 price target, which implies nearly 75% upside from current levels. (To watch Hundley's track record, click here)
Hundley commented, "The pursuit of cash flow and margin gains is critical, but the real opportunity for this company and its shareholders is within the revenue line; make no mistake about it, this is a volume play, in our view. So long as KushCo maintains its market leading position, we expect its top line to drive considerable value for shareholders, ahead. We believe that the company is now starting to see the initial benefits of scale, and we are excited about the forward opportunity as additional markets across North America turn to value-added recreational products, which require more packaging and innovative solutions. Management is upping its FY19 sales expectations to $140MM-$150MM; we are bringing our estimate up to the top end of this view, while also increasing forward revenue estimates for FY20."
Northland analyst Paul Penney added, "KSHB reported yet another quarter of healthy SKU / customer cross sell metrics, which tangibly reinforces our confidence in the company’s ability to build upon its existing / core customer base. More specifically, we were extremely impressed with the company’s major customer growth progress, with 12 (up from 7 last quarter) and 20 (up from 12 last quarter) customers producing >$1M and $500K+ of annual / run-rate revenues. This continued growth is yet another tangible validation point in KSHB’s ability to drive true / incremental value within its highly reputable and growing customer base."
Where are gross margins heading? "We believe these near-term margin issues remain mostly inconsequential as the company’s primary near-term focus is making huge market share gains, which it has continued to successfully achieve on a quarterly basis. Looking ahead and over a longer term basis however, we believe KSHB will be able to add ~800-1K basis points of incremental GM’s by YE 2020. We believe the underlying drivers of this improved profitability profile will be multi-fold, ranging from discontinued free shipping, contributions from the Koleto division (higher margin segment) and the anticipated weakening effects of tariffs," Penney opined.
Bottom line -- Penney reiterates an Outperform rating on KSHB stock with a 12-month price target of $8.75.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.