Cannabis Analyst: Charlotte's Web Model Update, Adjusted Estimates, Lower Price Target

The Analyst:

In a recent analyst note, Pablo Zuanic from Cantor Fitzgerald remained Neutral and lowered the 12-month price target price of Charlotte's Web Holdings Inc. CWBHF to $1.50 from $3.45, based on CBD sectoral derating and reduced sales estimates.

The Thesis:

Zuanic explained that the stock is down 44% over the last 3 months and calculates an enterprise value of $175 Million. Cantor’s sales estimates for 2022 remain 8% below FactSet consensus, but in line with the outlook range of 10-15% growth for the period assuming no regulatory changes.

Zuanic said he prefers to stay Neutral until there is more evidence available on the “ramp-up in distribution gains and improved EBITDA trends.”

“As explained in the last call, consumers are switching to more affordable formats (gummies vs. tinctures), so while industry volumes have grown, sales have not. We take 1.5x sales on our CY23 sales estimates to value the stock (this is near the current multiple for 2022), which is not excessively conservative given MSOs trade at 3.2x,” Zuanic clarified.

“Based on the ramp in sector deal-making, one could think the CBD market is thriving or set for significant acceleration. We have a more bearish view top-down: we think without Congressional legislation (jointly for cannabis and CBD), change is unlikely to happen; even if states like California become more flexible regarding the sale of CBD edibles (oils, tinctures, gummies, drinks), the national food-drug-mass retail chains (which follow federal rules) are unlikely to stock up on edibles,” he added.

Zuanic also mentioned that “despite the lack of meaningful regulatory catalysts in the year ahead,” Cantor is “becoming more constructive on Charlotte’s Web,” for three reasons:

a) the company continues to gain retail doors, expand formats and better leverage its brand portfolio (including Abacus);
b) it continues to gain share and consolidate its #1 position (up 5 points Y-o-Y in FDM ex c-stores to 27%); 
c) it is well-placed to deliver 10-15% sales growth in 2022 (under a status quo scenario on the reg front).

Financial Guidance

On the November 15th earnings call, management from Charlotte’s Web stated that the U.S. CBD industry is estimated to grow to $4.7 billion by year-end 2021, up 2.5% YoY. The segment within which Charlotte's Web competes will grow to $3 billion by year-end, up 0.7%.

“We've also been taking actions to build our organization that is fit for purpose to ensure our operating expenses are in alignment with our top-line as we head toward breakeven adjusted EBITDA at the end of the year,” Charlotte's CEO Deanie Elsner said.

Zuanic said the company should reach break-even EBITDA by Dec (not 4Q21), and be profitable by 1Q22.

Total revenue for the first 9 months is up 4.3% with 64% of revenue directed to consumers (down from 67% a year earlier) while B2B increased to 36%.

Strategic Outlook

According to Zuanic, the CBD channel development is different than originally forecasted. “The food/drug/mass (FDM) channel was forecasted to represent 66% of total CBD category sales, while e-commerce was forecasted to represent about 15% of CBD sales.”

However, “due to a lack of regulation, the FDM channels represent about 6% of the current CBD sales, while e-commerce represents about 38% of CBD sales,” Zuanic noted.

“The significant shift in channel sales indicates that consumers are going where CBD is being sold; e-commerce dispensaries, specialty and vitamin stores, and health care practitioners," Zuanic said. "Because of this shift, even with equal to or greater volume being sold overall, the growth that these lower-price formats have meant lower revenues for many companies across the industry relative to prior years."

The company gave guidance into their expectation of having products ready-to-launch in the Canadian market by mid-2022. In Israel, Charlotte continues to develop an exclusive partnership with Canndoc, (one of the fastest-growing Cannabis companies outside of North America) and expects to have products available in the country in 2022.

Price action

CWBHF traded 5.48% lower at $1.19 per share at the time of writing Friday afternoon. 

Photo By girl-with-red-hat On Unsplash