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I am here to seek and learn from the astute and be engaged in active debate about investing in stocks, particulary in stock options.
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  • Cannabis Industry: Valuation Of Creative Edge Nutrition 31 comments
    Jul 16, 2014 4:22 PM | about stocks: MDBX, FITX

    There are many different approaches in the financial literature to valuate a company, all of which have the salient goal of determining the actual dollar amount value of the company. This type of valuation can be subjective with numerous intricate complexities that are confusing to the average investor. Investors buying stock in companies that are currently trading at pennies can often find heavy criticism in the valuation and sometimes the entire merits of the company itself. To make matters worse, penny stock companies trading in somewhat speculative sectors (i.e., marijuana sector) can be more challenging to attract investors. However, the speculative sector can at times be one of the most certain areas of the market and potentially the most profitable. Likewise, it can also be exposed to the risks of tremendous uncertainty where shirking responsibility by corrupt management can be the haven for moral hazard and the demise of many companies.

    Creative Edge Nutrition, (ticker: OTCPK:FITX) has clearly been a topic of debate for investors in the bullish and bearish arena of the marijuana sector. Even at the forefront of obtaining license, expanding facilities, and notions of merging with RXNB, the valuation of CEN is still remaining ambiguous to many investors.

    This article will give insight in 1) brief introduction in determining PE ratio, and market capitalization, 2) compare the market capitalization of some comparable marijuana companies and 3) give a brief analysis on the earnings value of CEN.

    Valuation: A Necessity

    Company valuation can be uniquely described as a conformal mapping of varies elements in market capitalization, P/E ratios, outstanding shares, and other fiduciaries that delineate and quantify company valuation. These elements function to introduce a selection pressure into the valuation process. As one can recognize, valuation analysis requires a meticulous and systematic approach to minimize bias and create the most optimal range of parameters to determine the intrinsic worth of the company.

    Market Capitalization

    One way to determine the value or worth of company is by the market capitalization, (shares outstanding multiplied by price of equity). Notably, this valuation can have small changes almost daily, but more prominently during earnings, breaking news, or other relevant factors affecting a company. Many analysts use the market capitalization to evaluate whether or not a stock price is overvalued or undervalued, depending on market conditions and the fundamental operations of the company.

    CEN market capitalization

    The market capitalization of FITX has ranged from roughly 70 to 380 million dollars with the past 6 months. The volatility of the marijuana market, coupled with the delay in Health Canada inspection has given CEN a wide range of share prices. Currently, the market cap of FITX is estimated to be at 160 million, which has somewhat stabilized in this area within the past 3-4 months. This market capitalization does not reflect license, merger acquisitions, prospects of grow licensing in Michigan and Las Vegas, and other developing news for the company. Taking into account the average marijuana industry market cap to be roughly 180 million dollars (an average of 10 companies), FITX is seemingly undervalued. In fact, Medbox (OTCQB:MDBX), a marijuana company has a market capitalization of around 500-600 million dollars, is almost triple the market cap of most companies today. It is easy to entertain the thought that companies that produce revenue and hold strong profit margins can increase their stock price and thus their market capitalization tremendously. FITX has the potential surpass the market capitalization of MDBX within a short 12-16 month time frame and also increase the value of the company into billions. This would make CEN the ideal candidate for a buy-out company or to expand and acquire different pharmaceutical companies.

    (click to enlarge)

    CEN: Earnings potential

    Many notable investors have quickly realized the potential earnings of CEN. The consensus is as follows:

    The total square footage of building facility site 1 and 2 is estimated to be 80,000 square feet. If one assumes at least 50% of this area to be taken by dormitories, common areas, such as restrooms, grow storage, office, etc, then the actual grow area is roughly 40,000 square feet. (Of note, this does not include any other additional levels of grow area, such as a second or third levels that can easily increase square footage.)

    Assuming that one marijuana plant has an average space of 4 square foot, this would give roughly 10,000 plants in a 40,000 square foot area. If 1 lb of medical product is produced by 1 plant, then on average there is 10,000 lbs of medical product per harvest.

    With patent pending grow operations funded by RXNB and CEN, the efficiency, precision, accuracy, and enhanced grow productivity has increased tremendously. Reports have been given that grow cycles can be completed as early as 25 days with this new grow technology. However, if one assumes 35-day grow production per cycle, this would yield on average 10 cycles per year. Therefore if CEN can actually grow 10 cycles per year at 10,000 pounds per cycle, this would yield 100,000 lbs/year. (converts to 45.5 million grams of medical product). If a low marijuana sale price is given at $8.00/gram, then the revenue of the company would at staggering $363.2 million. Assume overhead of facility, staff payment, tax costs, and other expenses are at 40%, yielding still 60% profit margin, totaling to an estimated $217.9 million in net revenue. This type of operation can easily be multiplied with other facilities being built, such as site 2, 3, and 4. In addition, the earnings does not take into account hemp production from the recently acquired Hemp Technologies company.

    (click to enlarge)

    The PE ratio

    The PE ratio, or the price to earnings ratio, is determined by dividing earnings (income) by the number of shares outstanding. Usually, the PE ratio allows investors to determine the percent increase or decrease that a company's stock price is trading. In other words, the ratio allows you to determine by how many multiples the value of your company is worth.

    PE ratio of CEN:

    Roughly 3,500,000,000 shares are currently outstanding, and the company has a potential to earn conservatively $200,000,000 per year after MMPR license is granted and the facility is ready to grow medical marijuana. This would yield roughly .057 earnings to share ratio. (note this is not price to earnings ratio, rather the earnings to share ratio) This ratio (.057) will allow one to obtain the PE ratio by multiplying the ratio by the share price.

    However, in this scenario, it would be prudent in ones calculation to use a share price that would reflect the earnings of FITX. This approach would require one to simply use the average PE ratio of the marijuana industry to determine the potential price of FITX. Currently, the PE ratio for the marijuana sector is roughly at 15-20 times the value of their respective companies. This ratio means that on average, many company valuations are 15 to 20 time higher than their true value. For conservative purposes, FITX is given a PE ratio of 12.

    PE ratio of FITX =12

    12 = Price/ E = .057

    Price = $0.68

    It is paramount that investors realize that this price neglects multiple arenas of CEN that have not been integrated in the value of the company:

    1. Merger acquisitions with RXNB (can potentially double market capitalization)
    2. Hemp Technologies acquisition yielding much higher revenue and earnings
    3. New legalized marijuana insurance program
    4. Up-list to higher exchange
    5. A drastic decrease in shares outstanding, (retirement of shares, share buyback, or dividend shares in the long term)

    These catalysts can readily move the price per share of the company much higher. Once CEN becomes a mass producer pharmaceutical company, it will be almost impossible to imagine the share price to be lower than $2-3 within a 6 month period.

    In summary: CEN is undervalued

    While there is an art to investing in companies that are well established and have increase revenue and low PE ratios, many investors have found it more profitable to invest in companies that are still awaiting their future. CEN is becoming more attractive to investors in not only the existing valuation, but also the prospects of the company's pipeline in the future. Investing in pennies on the dollar can be a risky investment, but with the overwhelming transparency that Bill Chaaban provides to shareholders, the 20 million dollar private investment of building state of the art facilities, and an extremely reputable board of directors, CEN is clearly defying the odds and becoming the envy of other companies in the sector.

    It is of no surprise that this undervalued company is under such heavy scrutiny, but the promise of a future to help patient ailments with medical marijuana is an intangible quality that no amount of money or technical indicators can evaluate or buy.

    Disclosure: The author is long FITX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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Comments (31)
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  • Alan Brochstein, CFA
    , contributor
    Comments (7597) | Send Message
     
    I like the prospects for FITX, but your optimism seems excessive. What tax-rate do you use? What year will they get to "$200mm". What total market and market-share are you assuming?

     

    One can be a FITX bull at much less optimistic numbers, so don't get me wrong, but it seems like you forgot about tax and that you are assuming they can sell all those pounds.
    16 Jul, 05:19 PM Reply Like
  • rise51
    , contributor
    Comments (151) | Send Message
     
    Author’s reply » Thank you for reading my article. I am truly honored!

     

    a. i thought cutting about 40% away from the gross earnings would give us enough cushion for all those questions, (tax, overhead, etc)
    b. If each cycle takes about a month, I am seeing projected revenues in 3-4 months after HC approves.
    c. If facililites are multi-level floors, that means more surface area to plant, which I did not take into my calculation.
    d. Market share is an elusive number to estabilish, but I don't see why FITX can not have at least 75-80% of the market.

     

    Thank u again for reading my article!!
    16 Jul, 05:51 PM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7597) | Send Message
     
    I recall EBITDA margins of 60% being discussed, so one would need to cut into it a bit more for taxes. Also, they have sold off 25% of the revenue (not profits) for at least Building One. I don't think that they will be able to get the turns you talk about either. There will be multi-floors from what I understand, which gives you some more potential upside.

     

    You did a nice job of laying out some parameters - just seems the numbers are a bit aggressive. The good news is that you can use numbers way below there to justify investment assuming they pass their inspection. Great stab though - keep up the good work!
    16 Jul, 06:01 PM Reply Like
  • rise51
    , contributor
    Comments (151) | Send Message
     
    Author’s reply » Thank you Alan!
    16 Jul, 08:05 PM Reply Like
  • hottopix
    , contributor
    Comment (1) | Send Message
     
    Since when does taxes effect EBITDA margins? I guess depreciation kills them too...
    16 Jul, 08:38 PM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7597) | Send Message
     
    Taxes don't impact EBITDA margins, but they factor in the EPS
    16 Jul, 10:16 PM Reply Like
  • snippysmith
    , contributor
    Comments (56) | Send Message
     
    Cen Bio could easily have 75 to 80% of the market. The great news about the HC program is that they are actively encouraging patients to shop around with their prescriptions & try different producers & test strains to see what best suits their particular ailment. IF Cen Bio are as aggressive as they say they will be about quality & options then they will be very successful even if they only produce a fraction of what they have stated.
    They will get signed off on zoning IMO & i'm pretty confident they will go on to get their license from HC even if a few things need tweaking. HC are not putting a cap on number issued & have stated it will be a totally performance based open market for everyone that meets the license criteria. Lots of positives in the future for this company.
    16 Jul, 07:42 PM Reply Like
  • SherifsNear
    , contributor
    Comments (19) | Send Message
     
    What also needs consideration is the harvest cycles. Your charts assumes one harvest per year? Multiple harvests = higher crop yields. I think we could see three harvests a year if/when FITX gets their license. They have hired professional growers already. I think one should ponder multiple harvests & multiple building levels. I think its a definite with 1000W lamps.

     

    Thanks for your insights Rise51.
    16 Jul, 08:20 PM Reply Like
  • mass hysteria
    , contributor
    Comment (1) | Send Message
     
    What a great article; very clear and concise. I really appreciate finally reading an article without bias. Just the facts. Thank you!
    16 Jul, 08:22 PM Reply Like
  • oryon
    , contributor
    Comments (2) | Send Message
     
    very informative for a novice investor like me
    16 Jul, 08:22 PM Reply Like
  • mardom
    , contributor
    Comments (84) | Send Message
     
    Another great article. Thank you for all the work involved to compile and deduce this information.
    16 Jul, 08:25 PM Reply Like
  • mardom
    , contributor
    Comments (84) | Send Message
     
    Good questions, however if they can't, then who can in regards to market share ? The answer to that question may negate perhaps all the other companies in the Canadian MJ sector, short of 2015 countrywide legalization.
    That said, FITX was one of the 1st applicants with a comprehensive business plan and MMPR application. It made substantial investment in a brand new facility, and probably most importantly has had the advantage of witnessing the mistakes made by the 13 recipient's of what was to be considered "first mover advantage" licensing. That by all measures, both in market cap, and performance, have been faulty at best.
    This facility when licensed will hit the ground running, and for anyone who has started a business, understands the questions asked will not be answered until day to day operations commence, and productions runs are established. That probably includes Mr. rise51.
    16 Jul, 08:25 PM Reply Like
  • Smart guy 1
    , contributor
    Comments (25) | Send Message
     
    There is no doubt that Creative Edge Nutrition is an extremely undervalued bargain for a company that is poised to become a major player in several emerging industries.
    The Board of Directors looks like a Who's Who list of the type of experts that you would expect to see managing a Fortune 500 company. This is not just a company to watch, this is the company to buy into now!
    16 Jul, 08:27 PM Reply Like
  • Green&Golden
    , contributor
    Comments (39) | Send Message
     
    Nice article, I am considering re-purchasing-I emptied out a couple days ago. Might be worth it since Bill has again gone to radio silence! I was getting a little worried about his tactics.
    16 Jul, 08:34 PM Reply Like
  • SA_Member_8998191
    , contributor
    Comments (163) | Send Message
     
    FITX is 'marijuana related'? How so? How's their mmpr application's status? -- thanks for the help selling shares, says Bahige Chaaban.
    16 Jul, 08:36 PM Reply Like
  • Michel.landry001
    , contributor
    Comment (1) | Send Message
     
    Very interresting article , i learn about the ratios , and yes i agree about your évaluation .

     

    I recall Bill Chaaban saying Right from the beguining that Is plan was for 1,350,000.00 pound of médical marijuanna ... Per year .

     

    ...could it be possible ?

     

    I know from expérience that Monsieur Chaaban always give more than expected ...

     

    Its a wonderful ride to be on ...

     

    Thank you for your article .
    16 Jul, 08:38 PM Reply Like
  • Newbigtech
    , contributor
    Comments (72) | Send Message
     
    Would calls to Health Canada be worth a shot?

     

    Long FITX. NVLX. MCIG, ANAS
    16 Jul, 08:39 PM Reply Like
  • rise51
    , contributor
    Comments (151) | Send Message
     
    Author’s reply » i tried calling, they were very strict with their policies. so no. haha
    16 Jul, 09:19 PM Reply Like
  • LarryVenezia
    , contributor
    Comment (1) | Send Message
     
    I am also long FITX and if most of the scenario's that you mentioned come to fruition I can see a 3.00 pps . Valuations on these cannabis companies are for now hard to figure because it's a new sector etc. but for those that buy the right companies IMO will do very well.
    16 Jul, 09:15 PM Reply Like
  • rise51
    , contributor
    Comments (151) | Send Message
     
    Author’s reply » exactly, we were talking about this in the creative edge forum. i go by the name desmond fargo there. IF there is a 3 level floor that can have room for more plants, the earnings will be at around 1 billion or so, and that will give a PPS of around $3.30. HOWEVER, this is clearly down the road, but we arn't reinventing the wheel, we are just growing a plant--so the time frame should be sooner than anticipated--8-10 months?
    16 Jul, 09:21 PM Reply Like
  • epbdo
    , contributor
    Comments (10) | Send Message
     
    Great article once again! CEN-Biotech is clearly en route to being a leader in this industry. The closer to huge success a company gets, the more criticism and attacks that company will encounter, as has clearly been the trend for FITX. So, I see criticism of FITX as a very positive sign of impending success. The competition realizes this quickly approaching success too, and is worried for some of the reasons you have outlined very well in this article. Keep up the great information and articles!
    16 Jul, 09:50 PM Reply Like
  • Greenerdays
    , contributor
    Comments (16) | Send Message
     
    Another great article. Thank You! Nice to see an article that is laid out in a thoughtful manner.
    17 Jul, 12:36 AM Reply Like
  • fair.dinkum
    , contributor
    Comments (6) | Send Message
     
    There is only one thing to say. FITX LONG & STRONG
    17 Jul, 05:58 AM Reply Like
  • Rottweiler John
    , contributor
    Comments (2) | Send Message
     
    Every few days it seems I get an update regarding this company and every time they're adding people to the Board of Directors so I have to ask just how many people are on the board now and how much preferred stock or stock options are they getting? And how will this affect the value of my common stock?
    17 Jul, 08:42 AM Reply Like
  • Rottweiler John
    , contributor
    Comments (2) | Send Message
     
    every few days it seems I get an update regarding this company and every time they're adding people to the Board of Directors so I have to ask just how many people are on the board now and how much preferred stock or stock options are they getting? and how will this affect the value of my common stock?
    17 Jul, 08:51 AM Reply Like
  • Alien Nation
    , contributor
    Comments (15) | Send Message
     
    yes
    17 Jul, 12:19 PM Reply Like
  • we will see
    , contributor
    Comments (5) | Send Message
     
    Dont forget that they will be selling mj all over the world.. Not just in Canada.
    17 Jul, 12:50 PM Reply Like
  • rise51
    , contributor
    Comments (151) | Send Message
     
    Author’s reply » that is true, but i didnt want to be jumping the gun on that, theres ALOT in the pipeline, like the mj testing kits to check ur own blood levels, or the insurance program, and much more with RXNB, FDA/USA/CANADA regulations. I just haven't found a company this exciting...but like ur screen name says, "we will see"!
    17 Jul, 02:30 PM Reply Like
  • clinton77
    , contributor
    Comments (12) | Send Message
     
    Sold out of MDBX after the last earnings report. Long GWPH, FITX & HEMP in this space. IMO the best pics to outperform in the MMJ space going forward.
    17 Jul, 10:10 PM Reply Like
  • Klaydo
    , contributor
    Comment (1) | Send Message
     
    The million dollar question...
    When will they be licensed?
    18 Jul, 04:16 PM Reply Like
  • Indian420
    , contributor
    Comments (2) | Send Message
     
    Klaydo,

     

    it seems it always halts on the million dollar question. when will they be licensed?

     

    Author (Rise51) should at least provide some idea as when he thinks FITX will get license, if ever. I appreciate Rise51 article and information, but all of these means nothing without a license.

     

    So i will ask again, when will it be LICENSED?
    24 Jul, 06:21 PM Reply Like
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