Charlotte's Web Vs. CV Sciences Vs. Elixinol And A Saucy Intruder, Too

|
Includes: CGC, CVSI, CWBHF, ELLXF
by: Jonathan Cooper
Summary

CBD is forecast to be a booming market.

Three companies compete for the CBD crown.

Charlotte's Web is the blue-chip, CV Sciences is the best value, and Elixinol has the highest risk - but also the highest potential reward.

Might a saucy intruder "come in at the death and bear away in triumph the object of pursuit?"

Note: All dollar figures herein have been converted to U.S. dollars. Elixinol Global reports results in Australian dollars.

The CBD Market: Tremendous Growth Expected

The CBD market is expected to boom, with 45-70% growth forecast for several years to come.

The CBD market is hot. Sales have been growing quickly and are projected to continue growing. Above are two projections of the CBD market - one used by Charlotte's Web (OTCQX:CWBHF) and one used by Elixinol Global (OTCQX:ELLXF).

In each projection, the CBD market is expected to grow by 45-70% per year for at least three years from 2018. In Charlotte's Web's projection, the total market for CBD products in the United States will be 6-7.5x higher in 2023 than it is in 2019, which itself is already larger than reported results for 2018.

One big catalyst for this move was the signing of the Farm Bill in December 2018:

The Farm Bill is a major catalyst for all CBD companies including Charlottes Web

Source: Charlotte's Web First Quarter 2019 Investor Presentation.

The effects of this bill are shown above in Charlotte Web's January 2019 presentation. This bill, and the hype leading to this bill, has created a lot of interest in CBD products among consumers and even more interest in CBD companies among investors. That interest, in turn, has led to gains for each of Charlotte's Web, CV Sciences (OTCQB:CVSI), and Elixinol Global:

Chart Data by YCharts

Resources

The Big Three: Charlotte's Web, CV Sciences, and Elixinol Global

The three CBD companies that I will look at in this article are Charlotte's Web (CWEB.CN), CV Sciences, and Elixinol Global (EXL.AX). The CBD market today is very fragmented, but these are three of the largest publicly-traded, US-facing CBD companies on the market.

Charlotte Figi was saved from a life of constant seizures thanks to Charlottes Web CBD.

Source: Charlotte's Web First Quarter 2019 Investor Presentation.

Charlotte's Web is based in Colorado and is the #1 brand by market share. CWEB's products are available in 3,680 retail locations. Charlotte's Web is named after a heart-warming story of a little girl whose life was improved by CBD: Marijuana stops the child's severe seizures (CNN, 2013). Charlotte's Web products are available on their website, alongside the retail locations, and include a variety of CBD oils and CBD capsules. Charlotte's Web does not sell THC-based cannabis products. On Jan. 31, Charlotte's Web hired Stephen Lermer as their new Chief Operating Officer. Shares jumped 13.5% on the news.

CV Sciences is a Las Vegas-based U.S. hemp-derived CBD company. CV Sciences has one notable black mark on its record: Back in 2013, then-CEO Michael Mona Jr. may have committed fraud. This led to charges from the SEC in 2017 which were settled in 2018 - Mona Jr. accepted the punishment, was not forced to admit wrongdoing. Under the settlement, Mona Jr. resigned as CEO, president, and resigned his position on CVSI's board of directors. On Jan. 22, 2019, Mona Jr. retired from CV Sciences, although his son is still CVSI's Chief Operating Officer. Share prices rose 6.4% on the day Mona Jr. announced his retirement.

Elixinol Global is an Australian company whose operations are split up into three businesses: Elixinol Australia, Elixinol USA, and Hemp Foods Australia. Elixinol USA is a U.S.-facing hemp-derived CBD business which generated about 85% of Elixinol's revenue. Elixinol Australia is an Australian medical cannabis company that is not generating revenue yet. Hemp Foods Australia is a relatively stable, low-margin hemp-derived foods producer of non-CBD products like hemp-based protein. They released their Fourth Quarter 2018 results on Jan 31. Shares fell 9.5% on the day.

Comparing the Big Three

Above is a quick-and-dirty chart that is available on The Growth Operation, intended to provide a glimpse into each of these three companies. Data is from the most recent quarter where possible, although the nature of Elixinol's Australian reporting means that some data is estimated or based on previous quarters.

Charlottes Web is growing quickly, up from very little hemp a few years ago to hundreds of tons today.

Source: Charlotte's Web First Quarter 2019 Investor Presentation.

(1) Charlotte's Web is the largest of these three companies and has, arguably, the best branding. Charlotte's Web has revenue that is about 15% higher than CV Sciences and more-than-double that of Elixinol Global. Charlotte's Web also boasts the strongest margins of the trio, perhaps due to high volumes - Charlotte's Web boasts they planted 300 acres of hemp in 2018.

While Charlotte's Web is the largest company of the trio, it is also the most expensive. Charlotte's Web's market cap of $1.8 billion is approximately three times as high as that of CV Sciences and six times as high as Elixinol Global. While none of these companies could rightly be called value investments, Charlotte's Web is the costliest on both an EV/Sales and an EV/EBITDA basis.

With its size and its great branding, Charlotte's Web is the "blue-chip" of the three companies, although nothing in CBD - or cannabis - has the safety of a true blue-chip stock.

As I wrote about Canopy Growth in January, each of these three companies will need years of growth to prove they are worth their current valuations. That means that share prices here will be volatile: If the market's confidence slips, these prices could tumble. However, if the market's confidence grows, so too could share prices for all three CBD companies.

While Charlotte's Web is the largest CBD company on this list, it is not the fastest-growing. Instead, (2) CV Sciences is the fastest-growing CBD company here, with revenues that are up 10% QoQ and up 143% YoY:

This growth has enabled CV Sciences to close the revenue gap to Charlotte's Web. Back in September 2017, CV Sciences earned half as much revenue as Charlotte's Web. Today, they earn 77% the revenue. Further, CV Sciences is able to generate ~three-quarter as much adjusted EBITDA as Charlotte's Web, up from ~one-sixth as much in March:

Despite this rapidly-growing adjusted EBITDA, CV Sciences is still only worth about one-third as much as Charlotte's Web. This may be due to long-term overhang from the Michael Mona Jr. SEC fraud case, despite his subsequent departure. Investors who are squeamish about investing in companies with checkered pasts may be steering clear of CV Sciences. Perhaps because of this, CV Sciences trades at the most attractive EV/EBITDA ratio of the three companies, perhaps landing it as the best value of the three.

Elixinol has two revenue-generating segments: The slow-growth Hemp Foods Australia and the rapid-growth Elixinol USA

Source: Elixinol Global October 2018 Investor Presentation.

Although CV Sciences may be the best value, I believe that (3) Elixinol Global offers the most upside-potential of these three companies.

At first glance, Elixinol Global has much lower margins - gross and EBITDA - than both Charlotte's Web and CV Sciences. However, as I explored in my in-depth coverage of Elixinol on The Growth Operation, Elixinol's system-wide margins are held down by a few factors:

  1. Elixinol Global's results include those of Hemp Foods Australia ("HFA"), which is a stable, low-margin business. Stripping away HFA results, Elixinol is growing more quickly than it first appears and also has better margins.
  2. Elixinol USA's sales include both wholesale and bulk sales of CBD. Both of these businesses are lower-margin and lower-growth than Elixinol USA's direct-to-consumer sales. As direct-to-consumer sales continue to rise more quickly than other segments, Elixinol USA's margins may expand.

Elixinol's ceiling for growth may also be higher thanks to its international growth strategy in Europe and New Zealand. On Jan. 23rd, Elixinol launched its brand in New Zealand, following a recent legal change:

Leading global hemp CBD company Elixinol, has announced its entry into the New Zealand marketplace, offering its comprehensive range of cannabidiol ('CBD') products to the NZ public on a prescription basis via the elixinol.com website.

Colorado-based Elixinol is a wholly owned subsidiary of Australian-headquartered Elixinol Global Limited and has launched in New Zealand following the December 2018 passage of New Zealand's Misuse of Drugs (Medicinal Cannabis) Amendment Act. The Act classifies CBD with low levels of THC (the principal psychoactive constituent of cannabis) as prescription medicine and removes CBD as a Class B1 controlled drug. The Act recognizes CBD as a substance with 'therapeutic value with little or no psychoactive properties'."

Elixinol Press Release, January 23, 2019

Elixinol is the riskiest investment of these three businesses but may also have the most potential. In addition to the possibility of an international CBD business, Elixinol also has the potential - albeit a very speculative potential - of Elixinol Australia. That business has never generated revenue but is ultimately focused on bringing medical cannabis to Australians.

Perhaps due to its risk, Elixinol trades at the lowest EV/Sales ratio of these three companies. Due to lower EBITDA margins than CV Sciences, however, Elixinol trades at a higher EV/EBITDA than its Nevada-based peer.

Canopy Growth: A Saucy Intruder?

But who would keep a pack of hounds; or what gentleman, at the sound of the horn, and at peep of day, would mount his steed, and for hours together, 'sub jove frigido,' or a vertical sun, pursue the windings of this wily quadruped, if, just as night came on, and his stratagems and strength were nearly exhausted, a saucy intruder, who had not shared in the honours or labours of the chase, were permitted to come in at the death, and bear away in triumph the object of pursuit?"

Pierson v. Post, 3 Caines at 180-81 (NY [App] 1805).

In 1802, Lodowick Post was fox-hunting in New York. His dogs caught the scent of a fox and chased the fox while Post followed so that he could kill the fox. A saucy intruder intervened - Jesse Pierson - and killed the fox and carried it off as his own. Post sued Pierson, asserting that he was the rightful owner of the fox because the hunt had already begun and his dogs were chasing the fox. The legal question was when the fox itself became the property of Post - when his dogs smell the fox, when he kills the fox, or a time in between?

Canopy Growth (CGC) may become that saucy intruder, "bear[ing] away in triumph the object of pursuit" - the multi-billion dollar U.S. hemp-derived CBD market.

Canopy Growth might be the saucy intruder that comes in and steals away the CBD market after all the hard work has been down.

Source: Canopy Growth.

In January, Canopy Growth received a New York State hemp license and announced plans to invest between U$100 million and U$150 million to help create a Hemp Industrial Park in the state. I covered Canopy Growth's move into American hemp production in "Canopy Growth: Welcome To America" in January, but it is worth repeating that Charlotte's Web, CV Sciences, and Elixinol are not the only competitors in the U.S. hemp marketplace. Each of those three companies will have to compete not only with each other but also with U.S. multi-state cannabis companies including Green Growth Brands, Canadian licensed producers including Canopy Growth, and smaller CBD companies.

Competition will be fierce.

Happy Investing!

Disclosure: I am/we are long CVSI, CGC. 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.