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Does the Abacus Health Acquisition Make Charlotte's Web a Better Buy?

By David Jagielski – Jun 20, 2020 at 8:14AM

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More retailers are carrying its products, but will that be enough to lead the company back to profitability?

Merger and acquisition activity within the cannabis industry has been rare these days, especially as companies are focusing more on reducing costs than they are looking for ways to expand. However, some companies are still finding deals out there, including Charlotte's Web (CWBHF 1.27%).

On March 23, the hemp producer announced it was going to acquire cannabis company Abacus Health in a move that would expand its reach with not only more product offerings, but also more locations. However, with Charlotte's Web already having a strong presence across the country and the Colorado-based business posting losses for three straight quarters, investors may be wondering if the move was a good idea. Let's take a closer look and see whether the acquisition of Abacus makes Charlotte's Web a better buy than before or a stock to avoid.

A relatively inexpensive way to expand its presence

The all-stock deal implied a valuation of 99 million Canadian dollars ($68.2 million) on Abacus and didn't negatively impact Charlotte's Web's cash in the process. The deal was closed on June 11, at which point Charlotte's Web announced it had distribution in over 21,000 retail locations across the country.

Cannabis hemp oil.

Image source: Getty Images.

When Charlotte's Web released its first-quarter results of fiscal 2020 on May 14, it reported that its products were in more than 11,000 "retail doors." That's up from the more than 6,000 locations carrying Charlotte's Web products in the first quarter of fiscal 2019. The company was successful in getting access to more retailers, the acquisition of Abacus merely accelerates Charlotte's Web's growth.

Abacus' existing products, including topical medications, will also allow Charlotte's Web to grab more of the hemp-based cannabidiol (CBD) market in the U.S. CEO Deanie Elsner stated that "the addition of Abacus Health cements a market leading position in both topical and ingestible products in the CBD category, representing approximately 33% market share of the U.S. CBD food/drug/mass retail channel."

Is the acquisition of Abacus a good move for Charlotte's Web?

Charlotte's Web is adding more products to its portfolio and gaining access to more retail locations for a modest purchase price that isn't going to lead to a large outflow of cash. The only negative is that as with any acquisition, there's the potential for inefficiencies at the start of the process that lead to more expenses and a worse bottom line, at least in the short term.

But other than that, this is a fairly low-risk move for Charlotte's Web at a time when the company has struggled to find growth. Its Q1 sales of $21.5 million were down from the $21.7 million Charlotte's Web brought in a year ago. It was its lowest revenue figure since the fourth quarter of fiscal 2018, when it also had revenue of $21.5 million.

Despite an increase in retail locations, Charlotte's Web has been struggling to find ways to grow its top line consistently. With more products and more locations, the acquisition of Abacus can help change that. The one caveat, of course, is the COVID-19 pandemic and what impact it may have on Abacus and Charlotte's Web in the near term. In Q1, Charlotte's Web said its business wasn't disrupted due to the pandemic, but that was also during the early stages of the outbreak in the U.S. It also helps that about two-thirds of the company's sales come from e-commerce.

Having more locations and more products can make the combined company more resilient against whatever adversity may be coming its way, and that helps make the company a better buy today.

Should you buy Charlotte's Web today?

The acquisition of Abacus does give Charlotte's Web investors a reason to be more optimistic about its future growth. However it's by no means a slam dunk that it will be enough to get the stock back into the black on a consistent basis. With losses being the norm of late, the company's own growth may doing more harm than good as there are more stores carrying its products but that isn't translating in significant sales growth or a stronger bottom line.

Charlotte's Web has also incurred negative cash flow from its day-to-day operating activities in each of the past seven reporting periods.

Although investors were bullish on the acquisition and the stock soared following the news of the purchase, Charlotte's Web stock is still down more than 40% since the start of the year. By comparison, the Horizons Marijuana Life Sciences ETF (HMLSF -8.37%) is down 19% over the same period. The gap wasn't that big, however, until Charlotte's Web took a nosedive in recent days after announcing that it would be raising CA$67.5 million ($49.9 million) in a share issue, further diluting shareholders.

Charlotte's Web had $53 million in cash on hand as of March 31 and in Q1 it burned through $14.9 million in cash as a result of its day-to-day operating activities. The offering, combined with COVID-19 uncertainty and the complexities of a new acquisition suggest that there may be more of a strain on the company's cash now than there was even a few months ago. And amid so much uncertainty, investors may want to hold off on investing in Charlotte's Web for the time being.

The acquisition of Abacus does make Charlotte's Web a stronger company with more ways to grow, but that's still not enough of a reason to buy the stock today. Investors are better off waiting until the company releases its second-quarter results to see how well it's been doing during the pandemic and whether there's been any improvement in its bottom line.

With many pot stocks to choose from out there, Charlotte's Web hasn't done enough to differentiate itself. If the company can get back to breakeven, that will be a big step forward. But until that happens, investors should avoid the stock.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Charlottes Web Holdings. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
$0.39 (1.27%) $0.00
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$4.49 (-8.37%) $0.41
Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
$0.53 (5.00%) $0.03

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