Pablo Zuanic, a Cantor Fitzgerald employee, provided an update on Charlotte's Web Holdings, Inc. CWBHF, a vertically integrated company that is dedicated to the production and distribution of hemp-based health and wellness products. Zuanic kept a rating of Neutral for CWBHF and lowered its 12 month price target to $0.70 from $1.20 on CBD sectoral derating and reduced estimates.
Charlotte's Web saw a drop of 22% in sales in the first quarter of 2022, with online 68% of sales down 14% sequentially and B 2 B down 34% in the second half of 2021 due to pipeline fill.
Its gross margins increased by 2.2 pt YOY to 60.5%. The negative EBITDA margins worsened - 27% due to operating deleverage.
As the industry's leading brand and the one with the most credibility, science and consistency, according to management, the company believes that it has enough brand equity to enter new verticals travel, leisure, sports and beverages and expand distributor agreements, and even in a flat market, sales could be 40 - 50% above current levels by the second half of 2023, according to management.
The regulatory changes no real visibility for now would classify CBD as a dietary supplement and set stricter guidelines that would weed out smaller fly-by-night operators, though the upside could come from regulatory changes. The valuation is attractive at 1 x our CY 22 sales estimates, but given disappointing first-quarter top-line performance and the stock mostly a show me'' story, we prefer to stay Neutral, Zuanic said.
According to Zuanic, the stock is down 59% over the last 3 months compared to 35% for the YOLO ETF S&P - 7%. On our below FactSet consensus estimates, CBWHF is now trading at 1 x CY 22 EV Sales and 0.8 x CY 23 EV of $82 Mn; market cap is $75 Mn On the surface, the valuation is attractive, but question marks about industry growth and ongoing negative EBITDA and cash flow limit the upside,
He said in the first quarter of 2022 net cash fell from $5 million to $14 million.
The company would have a net debt position, including leases of 0.3 x to sales, by YE 22. If the company can grow the shares 1.5 x to 2 x from current levels and get to positive EBITDA and cash flow, then we believe the stock would re-rate, according to Zuanic. We prefer to remain Neutral for now. We now use 0.8 x sales to value the stock, compared to 1.5 x before, and this results in a price target of US $0.70 by June 2023. We need to rate stocks Overweight due to the volatility of the sector. CWBHF has to invest more in order to drive sales growth and protect its share.
Its profitable e-commerce platform can be negatively impacted by new brick and mortar listings.
Lackluster results from entry into new verticals formats;
The main challenges are hemp oversupply and lack of regulatory changes at the federal level.