The CBD Sector: A View From The Trenches – Seeking Alpha

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Investment thesis

The U.S. CBD market has been growing exponentially of late and a recent report by Cowen Inc.(NASDAQ:COWN) estimated that sales in this sector are expected to grow from ~ $600M in 2018 to $16B in 2025 which would be an annualized growth rate of more than 50%. CBD Is now broadly available across various retail verticals as shown by this table:

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However, although the industry has significant potential, the panelists acknowledged that this nascent sector has several challenges including increased competition, regulatory uncertainty and lack of consumer awareness and education. The passage of the 2018 Farm Bill was undoubtedly a transformational change but consensus was that some degree of FDA regulation is sorely needed. Senate Minority Leader Chuck Schumer (D-NY) recently said that he wants the FDA to expediently issue guidance so that hemp-derived CBD can be lawfully marketed on a Federal level. The specific timing of this happening is unknown with a horizon of 6 months to 3 years a likely scenario amongst the panel. One key issue facing industry leaders at the present time is how to successfully navigate the “choppy waters” of an uncertain regulatory environment and enhance shareholder value by increasing market share in this competitive landscape,

The CBD market today

The term “Wild Wild West” has been used to describe the CBD market today, with estimates of more than 10,000 products available to consumers. Given the multitude of products in the CBD sector I was quite surprised that a company I’ve patronized was among the highest-end CBD-infused products on the market according to wweek.com. However there is growing evidence that increased consumer awareness and education is contributing to more “mainstream” adoption. Whole Foods Market Inc. (“America’s Healthiest Grocery Store”) recently expanded distribution of topical CBD products to more than 350 locations in 30 states. Jennifer Coleman, global senior category merchant for the company said “Our shoppers have expressed a growing interest in CBD products” in a statement on 9/18/19 announcing the expansion. Despite the present lack of regulatory clarity and the myriad of ineffective and unregulated products, I believe the long-term future of the CBD sector has considerable potential That said, let’s learn more about the 3 publicly-held companies that represented the industry at this invitation-only conference.

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About Abacus Health Products, Inc. (OTCQX-ABAHF)

ABAHF has a market cap of $84.5M and their peer group is DYMEF, PLPRF, CCHWF, CNXXF and VIREOF according to SeekingAlpha. Abacus’ products are aimed at the rapidly growing markets for topical pain relief and therapeutic skincare. The Company operates two lines of products: CBD CLINIC, marketed to the professional practitioner market, and CBDMEDIC, marketed to the consumer market. CBD CLINIC products are sold exclusively to registered health practitioners such as chiropractors, acupuncturists, massage therapists, physical therapists, naturopaths and osteopaths. CBDMEDIC products are sold directly to consumers through retail outlets, health and fitness locations as well as through an e-commerce platform.

Source: Company’s 11/25/19 Sedar.com filing

Here are links to to official CBD CLINIC and CBDMED videos.

A download of a recent company’s investor presentation (registration required) is available at ABAHF’s website..

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About CV Sciences, Inc. (OTCQB-CVSI)

CVSI has a market cap of ~$144M and their peer group is CWBHF, KSHB, OGI, TRTC and SPRWF according to SeekingAlpha. CVSI operates two distinct business segments: a consumer product division focused on manufacturing, marketing and selling plant-based CBD products to arange of market sectors and a drug development division focused on developing and commercializing CBD-based novel therapeutics utilizing CBD. The company’s PlusCBD™ Oil is the top-selling brand of hemp-derived CBD on the market, according to SPINS, the leading provider of syndicated data and insights for the natural, organic and specialty products industry. On 11/11/19 CVSI CEO Joseph Dowling announced a new distribution partnership with Southeastern Grocers, Inc. with an initial launch at 115 Winn-Dixie stores in Florida and 37 BI-LO stores in South Carolina.Here’s a link to an informative video regarding the benefits of their flagship product which is “nutrient rich, non-psychotoxic, eco-friendly and good for the earth” according to the company’s website.

Sources: cvsciences.com, company press releases and youtube.com

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About Turning Point Brands, Inc. (NYSE:TPB)

TPB has a market cap of ~$525M and their peer group is SDI, KERN,ELLXF, TLLTF and GNLN according to SeekingAlpha. The company’s CBD products are marketed and distributed by Nu-X Ventures, a wholly-owned subsidiary formed in January, 2019 and dedicated to the development, production and sale of alternative products and acquisitions in related spaces. As of 9/30/19 Nu-X alternative products sales totalled $11.4M (including the Solace acquisition) and an additional eight months of IVG net sales in 2019. The company has issued guidance that in Q4 they will be broadening the suite of Nu-X CBD products to meet the demands and desires of their retail partners and consumers as they focus on attaining a market leadership position in the rapidly growing CBD market.

Investment outlook of ABAHF, CVSI and TPB in today’s “frothy” market

I stated in my article of 9/5/19 that I was bullish on ABAHF’s stock based on my “buy the numbers” methodology which focuses on ratio analysis of a company’s financial statements. On 11/18/19 Edison Group initiated coverage of ABAHF which it updated on 11/26/19 based on strong Q3 sales. On 11/21/19 Abacus Health Products, Inc. released the following Q3 financial summary:

  • Revenue increased 97.4% YoY to $4.1 million and sequentially 26.4% from Q2 2019
  • Gross profit increased 100% YoY to $2.4 million and sequentially 24.0% from Q2 2019
  • Gross margin increased YoY to 60.1% from 59.3%

I believe that these 2 events reinforce the validity of my modelling work, which is being updated to account for Q3 metrics in anticipation of a follow-up article regarding the company. I’m somewhat surprised that ABAHF’s stock has been under price pressure since strong Q3 earnings were announced but I attribute this largely to market conditions and the company’s low average daily volume of less than 20,000 shares. However, I’m reiterating my bullish rating on ABAHF’s stock given the company’s continued healthy financials. I also stated in my prior article that “Gronk would be a game-changer” for the company, and the benefits of #87 being a CBD advocate and partner to Abacus Health Products, Inc. and CBDMEDIC have already begun to reap benefits. On 10/25/19 ABAHF announced a partnership with New England Patriots owner Robert Kraft’s Gillette Stadium and Patriot Place. Here’s a screenshot of CBDMEDIC’s Rob Gronkowski logo which will be adorned and adored by Patriot Nation:

https://lh5.googleusercontent.com/VoXgjxiQFsC2mOfsaOFRENV4aVO60YJnUvw8Wc3pl7aUDbTl70RP6kR6FFr3czfHkneL_Teqw0jBvmjU8buKfymIraZiCWn8jaUln0wDKT3dXkKBb45FC25Z8M65HwTHQiXcGS8Q

Source: Boston Globe

I’m bearish about the stock of CV Sciences, Inc. which is down ~45% since reporting disappointing Q3 earnings on 11/5/19. The chartist in me believes that a new YTD low is looming on the horizon given its weak trading pattern.. CVSI has recently disclosed that co-founder Michael Mona III submitted his resignation from his position as the company’s Chief Operating Officer (“COO”), effective 1/1/20. In my view, his upcoming departure adds a pronounced degree of uncertainty regarding the future direction of the company as well as Mr. Mona’s potential disposition of part or all of his substantial holding of CVSI stock.

I consider Turning Point Brands, Inc. stock as a “hold” primarily because of my serious concerns regarding their exposure to the vaping crisis. My strong sense is that this will likely result in a significant goodwill impairment charge in Q4 which would affect both the company’s balance sheet and income statement. Another Q4 news release of significance was that on 11/18/19 TPB’s parent Standard Diversified Inc. (NYSE:SDI) disclosed that they will pursue a corporate reorganization with the company. I view the uncertain time frame regarding the resolution of this critical issue as another reason why I would avoid buying TPB stock at this time.

Conclusion

Based on the foregoing discussion, the 3 companies that participated in the CBD panel discussion all share the same critical concerns regarding increased competition, lack of regulatory clarity and an evolving CBD sector. It is clear that FDA involvement is key in order to “weed out” the plethora of products which may be ineffective and/or unsafe. This will benefit legitimate companies whose mission is to improve the wellness of their customers and adhere to rigorous product testing and validation. These headwinds present a formidable challenge as Abacus Health Products, Inc., CV Sciences, Inc. and Turning Point Brands, Inc. and other CBD companies endeavor to attract and maintain investor interest. Based on my “survival of the financially fittest” focus, I believe that ABAHF has clearly positioned itself as having potential for enhancing shareholder value given their strong and sustainable financial profile . I will closely monitor the CBD industry on a macro level and on a micro level, I intend to follow the progress of ABAHF as they develop, refine and execute their business plan.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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