Charlotte's Web Is Still Much Of A 'Show Me Story', Analyst Explains Why

The Analyst

Pablo Zuanic, from Cantor Fitzgerald, provided an update on Charlotte's Web Holdings, Inc. CWBHF, a vertically integrated company 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.

The Thesis

Charlotte’s Web saw a sequential drop of 22% in the sales of the first quarter of 2022, with online (68% of sales) down 14% sequentially and B2B down 34% following pipeline fill in the second half of 2021.

Its gross margins improved 2.2pt YOY to 60.5%. However, its 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, behind it, according to management), albeit with only >3% share in a $4 billion industry, the company believes it has enough brand equity to enter new verticals (travel, leisure, sports), successfully roll out new product formats (beverages and cosmeceuticals), and expand distributor agreements,” Zuanic said, adding that even in a flat market, sales could be at a run rate 40-50% above current levels by the second half of 2023, according to management.

“Upside could also come from regulatory changes (no real visibility for now, though) that would classify CBD as a dietary supplement and sets stricter guidelines that would weed out smaller fly-by-night operators. At 1x our CY22 sales estimates, the valuation is seemingly attractive but given disappointing first-quarter top-line performance and the stock remaining mostly a 'show me' story, we prefer to stay Neutral,” Zuanic added.

Valuation and price target

Zuanic explained the stock is down 59% over the last 3 months vs. -35% for the YOLO ETF (S&P -7%).

“On our below FactSet consensus estimates, CBWHF now trades at 1x CY22 EV/Sales and 0.8x CY23 (EV of $82Mn; market cap of $75Mn). On the surface the valuation is attractive, but question marks about industry growth and ongoing negative EBITDA and cash flow limit the upside,” Zuanic said.

He noted in the first quarter of 2022 net cash before leases fell sequentially from $5 million to $14 million.

“By YE22 the company would be in a net debt position (including leases) of 0.3x to sales. Yes, if the company can grow shares 1.5x to 2x from current levels and get to positive EBITDA and cash flow, we believe the stock would re-rate,” Zuanic said. “But for now, we prefer to remain Neutral. We now use 0.8x sales to value the stock, vs 1.5x before, and this results in a price target of US$0.70 by June 2023. Given the sector volatility, we need 50% upside to rate stocks Overweight.”

Investment risks

• Slowing CBD category;
• FDM channel remaining reluctant to oils, tinctures, edibles, strips, sprays, and drinks;
• CWBHF has to spend more to drive sales growth and protect its share;
• New brick and mortar listings cannibalizing its profitable e-commerce platform;
• Lackluster results from entry into new verticals/formats;
• At the sectoral level, hemp oversupply and lack of regulatory changes at the federal level, represent the main challenges.

Image By Ilona Szentivanyi.