2020 has not been a good year for investors of the world's leading CBD oil manufacturer, Charlotte's Web Holdings (CWBHF +0.00%). Not only has its underlying business underperformed, but the company's stock price has been slashed in half since the year started. Indeed, an investment of $10,000 in January would be worth less than $5,200 as of July 17. The S&P 500 has barely budged over the same period.
Besides the gloomy financials, however, there is light at the end of the tunnel. Currently, Charlotte's Web is trading for as little as 5 times sales. That's an incredibly cheap price to pay for a high-quality CBD oil company. Today, let's take a look at why I think Charlotte's Web is about to regain its momentum from before the coronavirus pandemic.
Image Source: Getty Images.
The bad news first
Due to quarantine and lockdown measures to contain the COVID-19 pandemic, almost all of the 11,000 retail stores selling Charlotte's Web's CBD oil, gummies, capsules, topical formulas, and pet CBD products were forced to close down, hurting revenue.
In 2019, Charlotte's Web grew its revenue by 36% year over year. However, in the first quarter of 2020, the company recorded no growth in its sales. Moreover, Charlotte's Web recognized a pre-tax net loss of $5.21 million, compared with pre-tax net income of $3 million.
There were, however, no substantial threats to Charlotte's Web's financial health. The company has more than $53 million in cash and little debt, and it managed to raise more than $57 million via equity in June.
Why a sharp rebound is coming
In June, Charlotte's Web closed its acquisition of Abacus Health Products, a company focused on creating CBD-based over-the-counter topical health products. Abacus Health's topical creams are being sold in 12,000 pharmacies across the U.S. and have the recommendations of over 16,500 health practitioners.
Due to pharmacies' essential nature, it is unlikely Abacus Health has been materially affected by COVID-19 as has Charlotte's Web. Last year, Abacus Health recognized revenue of $15.5 million, representing 82% year-over-year growth from 2018. Together, Charlotte's Web and Abacus Health now have a 35% combined market share in the food/drug/hemp CBD industry.
As the U.S. and Canada begin opening up, I think the demand for Charlotte's Web's products will return. The company recorded impressive 29.4% year-over-year growth in its e-commerce sales for the quarter ending March 31. Now, as retail stores reopen, Charlotte's Web is forecasting 10% to 20% revenue growth for fiscal-year 2020 without accounting for its Abacus Health acquisition. That's about $105 million to $115 million in revenue, which is fantastic for a company with a market cap of just $500 million.
In addition, shareholders should be relieved to hear that Charlotte's Web predicts it will break even this year in terms of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Last year, the company recorded more than a 33% reduction in cost per milligram of CBD produced, and management expects further cost savings this year.
With continued growth, return to profitability, and impressive annual guidance of 60% in gross margin, Charlotte's Web presents investors with a solid bargain. Hence, I believe every cannabis investor who is looking for growth would be well rewarded for adding Charlotte's Web to their portfolios.
