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Cannabis Industry: Valuation Of Creative Edge Nutrition

|About: Creative Edge Nutrition, Inc. (FITX), Includes: FITX, NGBL


Creative Edge Nutrition is undervalued.

Many marijuana companies have market capitalizations above CEN.

CEN earnings potential can be extremely profitable for investors.

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: OTC: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 (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.

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.

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.