Last January, I reviewed my stock picks for 2017 in an article on my Seeking Alpha blog and noted how Player's Network (OTCQB:PNTV) had gained 760% for the year from $.015 on January 3 2017 (the first trading day of 2017) to $.129 on December 31, 2017. I then advised my readers that a long term hold of PNTV for another year was warranted as I anticipated significant growth to take hold. Popping the champagne corks proved to be a little premature as an announcement from Jeff Sessions a few weeks later sent the entire sector into a tailspin for the next few months.
At the time, shareholders had been told that phase II construction at their new cultivation facility, Green Leaf Farms, had been completed in November and they were anticipating that, any day, the company was going to announce a date for their first harvest. Unfortunately, due to last minute changes in regulations and delayed inspections, Green Leaf Farms had not received its Certificate Of Occupancy from the City of Las Vegas to begin operations. The go ahead wasn't received until February 14. The delay pushed back the estimate for their initial harvest, and first significant revenues, to sometime this month, while their share price drifted to a new 52 week low of $.0352 on May 2. On June 1, PNTV closed at $.0559/share. So now that we're almost half-way through the year, let's take a fresh look at PNTV's prospects.
First Las Vegas Harvest Slated For June
I had an opportunity to visit Green Leaf Farms in late February and wrote a review in my blog. Phase II allows cultivation on 8,000 sq ft of indoor warehouse space with room to expand to 27,000 sq ft when Phase III is completed. Geoffrey Lawrence, their CFO, estimates that Phase II alone will bring in in excess of $408,000/month in revenue once it's in full production mode within the next few months.
The progress on Green Leaf Farms has been slow and painful for investors as they've watched the share price bleed while they waited for significant revenues to develop. Assuming everything went as planned, the actual numbers wouldn't start showing up in the company's financials until the 2FQ18 10-Q was reported in mid August, and then we'd only see less than a full month of production. Wouldn't the continued uncertainty and lackluster financials surely take a further toll on the share price?
A Jump Start On Revenues
The answer came on May 10 when Players Network made a surprise announcement that they had not only acquired a " 56,000 sq. ft. fully operational greenhouse complex licensed for cannabis cultivation in Salinas Valley California ", but that they would be able to record revenues averaging $800,000/month retroactive to May 1. The acquisition, which closed on May 24, was described by CFO Geoffrey Lawrence as the "crown jewel" of the company's new "cohesive growth strategy" of more planned acquisitions of "fully operational cultivation facilities to join the PNTV family".
The company expects annual revenues of $11 million from this new facility. In subsequent videos, CEO Mark Bradley revealed that they also expect a 30% gross profit margin while Director Brett Pojunis described it as a real big game changer for the company adding 150 to 200 thousand dollars per month to their bottom line. That would translate to just under 22% net profit at the high end.
At 64,000 square feet of total productive cultivation space, the acquisition positions the company to be the largest publicly traded marijuana cultivator in the US and 13th largest overall.
Forward PE and a Rational Share Price
I consider the current share price between $.05 and $.06/share to be a significant bargain for long term investors. I arrive at this conclusion by using a technique I refer to as a "Rational Share Price". The intent isn't to arrive at a specific forecast, but to determine if the current share price is irrationally overvalued or undervalued and, as a corollary, to evaluate various claims by bloggers and amateur analysts on penny stock boards to see if they make sense. It is difficult to evaluate penny stocks since they are often relatively new companies with significant debt and little current revenue which have yet to produce a profit. This is compounded when you have a new market sector such as marijuana with only a handful of companies that have produced positive earnings and measurable financial statistics.
In these situations, I believe the Rational Price technique can give us some guidance. We begin by adding up the revenue estimates given by management for the next 12 months. In the case of Players Network, during my tour of GLF I was told by their CFO Geoffrey Lawrence that they expect to be able to harvest $408,000 worth of bud (180 lbs) per month from their existing phase 2 grow space starting with a first harvest of about $170,000 (75 lbs) harvested in June (presumably not a full month's worth).
Geoff, in a later PR, also stated that the new greenhouse in California is estimated to generate $800,000 in total revenue in May based on it's existing track record. There's no reason to believe that they can't generate this same revenue on a monthly basis going forward, particularly since PNTV is hoping to increase the revenue by installing lights to increase winter yield once they take over.
Next, we come up with an estimate of the company's average Outstanding Share count (OS) for the upcoming 12 months. PNTV's current OS count is roughly 590,000,000 shares. Let's assume they issue another 60,000,000 shares over the next year for an average OS of 620,000,000 shares (EPS is based on the average OS over 12 months not the latest OS). I'm assuming that the $5 million in convertible debt that PNTV takes out to cover the cost of the California property is converted at an average pps of $.10/share (probably a low estimate). If so, it would cost PNTV 50 million shares (I'm arbitrarily adding another 10 million shares as a buffer to cover other expenses). Keep in mind that the loans are in monthly $1,000,000 installments, none of which can be converted for an initial 90 day period. Some of these loans will probably be paid off from company earnings rather than converted but we're looking at a worst case scenario here.
The next step is to come up with a profit estimate. According to Mark on his last video, PNTV expects to make 30% gross profit on the California facility (let's assume that it will be the same for Las Vegas). If we assume another 10% will go towards overhead, we could see a 20% net profit/earnings. This conforms with Director Brett Pojunis' projection of up to a 22% net profit margin. Let's finally assume that PNTV management has done due diligence on the acquisition revenues and are targeting rational estimates for the Las Vegas operation. Then, starting as of July 2018...
$408,000 + $800,000 = $1,208,000 revenue/month x 12 = $14,496,000/year
$14,496,000 x 20% net profit = $2,899,200 net profit/year
$2,899,200 / 620,000,000 avg OS = .00468 Earnings Per Share (NYSEARCA:EPS)
The final step is to decide on a rational Forward Price/Earnings ratio. Since, as previously pointed out, the Marijuana sector is relatively new with only a handful of profitable public companies, we must look for other sources for comparison. Stern School of Business at NYU posts an annual survey of PE ratios and other business statistics which can offer some guidance. Unfortunately, the Marijuana sector doesn't yet have it's own category. The Forward PE's for most sectors probably range between 15x and 50x but the list is dominated by legacy industries, most of which are experiencing little growth. Marijuana, on the other hand, should probably be compared to other high growth sectors such as Retail (Distributors) 117.87x, Entertainment 60.79x or Healthcare Products 136.52x. I was trying to be a little conservative and I settled on 40x and 80x as a reasonable range for this high growth sector. In any event, the current value of the forward PE, 11.9x ($.0559/$.00468) is way out of range and points to a share price that's a significant bargain. At a 40x and 80x Price Earnings multiple we get the following price range...
$.00468 EPS x 40 PE = $.1872/share
$.00468 EPS x 80 PE = $.3744/share
At the high end, a forward PE of 100 ($.47/share) to 200 ($.94/share) is still possible but suggests a sector that is on fire with investors. While this might have been true last January and may again prove to be true in the future, I'm not sure we can make that case for marijuana today. Once we get over a forward PE of 200 we start pushing the limits of rationality with only one sector, Drugs (Biotechnology) at 289.91x enjoying that rarefied atmosphere.
So with these conservative assumptions a value of roughly $.19 to $.38 would be rational and PNTV is currently significantly undervalued.
Again, I believe these estimates are pretty conservative. They don't take into account the expansion of PNTV's Nevada operation once phase 3 is completed or additional revenue that PNTV might be able to generate from the new California property and any additional acquisitions. We also don't know how much additional revenue might come from Weed TV and their media operations or their new crypto currency initiative.
I should also note that the company's next 10-Q financials (for 2FQ18 thru 6/30/18) which are due to be reported in mid August will only show partial revenues from June for Las Vegas and only two months of California revs. We won't see the full impact until the 3FQ18 10-Q which will come out around mid November.
Consequently, I stand by my prediction in January that PNTV will finish the year with a significant gain.
Disclosure: I am/we are long PNTV.