- CV Sciences remains the best value in cannabis/hemp.
- We expect Y/Y strong sales growth continues.
- We suggest investors move from Canadian growers to U.S. manufacturers.
- Upcoming NASDAQ listing offers near-term share appreciation potential
CV Sciences Inc.'s (CVSI:OTCQB) Q3 2018 earnings are due November 6th. Looking into sector sales and speaking with retailers, we believe the CVSI early-mover advantage continues to drive incremental growth. The CBD phenomena grows.
After a blow-out Q2, with Y/Y sales growth over 200%, realistic growth expectations suggest Q3 2018 revenues hit $13.3 million, on track with our prior estimates. We believe CV has hit the $50 million annualized sales run rate and look for confirmation in Q3 numbers, consistent with the prior (Q2) 200% Y/Y annual growth rate. We expect 8% growth on a sequential quarter basis.
We also expect continued strength in gross margins; Q3 gross profit should handily beat Q3 2017's $4 million. We estimate Q3 at $9.5 mm for a 70% gross margin, another large Y/Y jump.
We wish investors would look deeper at this metric, which, in our opinion, indicates a superior business model. CV Sciences is a value-added manufacturer, not a hemp grower—sort of like Big Liquor—the money's not in farming raw material. Low traditional farming margins and high capital outlay for fancy grow factories, which are not necessary in California, or most of the hemp-growing world, don't make sense to us.
The bottom line—and we apologize to cannabis investors as the term "net profit" is unknown—we expect CVSI to remain respectably profitable. We estimate Q3 GAAP net income will hit $3.3 million.
Additional background? Please review our initial September 24th report.
Cannabis/hemp market in transition
We continue to urge investing preference away from Canadian cannabis growers into U.S.-based value-added manufacturing. Cannabis prices are already behaving like any other commodity: as supply grows, prices decline. We suspected, and early market evidence appears to confirm, the October 17th Canadian full cannabis legalization was a "sell the news" event.
Our thesis: The Canadian cannabis bubble peaked in January 2018 and the August run-up was the beginning of a paradigm shift as investing "action" shifts from Canada to U.S. cannabis/hemp companies.
Our caution/preference for better value surely includes Tilray (NASDAQ: TLRY), which is, in spite of the sales pitch, a purely Canadian operator.
We urge investors to look at both the remarkable growth and relative value of CV Sciences. We do not think last quarter's growth spurt was a fluke and we remain cautiously optimistic waiting Q3 confirmation. We remain optimistic the investing world will soon accept CV's string of good quarters as a bankable trend from a superior business model, and we favor CVSI as a relative sector outperformer.
In the meantime, since market participants tend to buy, or sell, everything simultaneously, risk-orientated investors may consider CVSI on any dip into the $3 range.
Decent looking chart; perhaps a favorable buying opportunity on any sector-related dip (Source: Stockcharts)
Frederick Lacy, President of Fincom Investment Partners, began as a Chicago commodity broker in 1984. In 1987 he joined Bateman Eichler, Hill Richards in Los Angeles, focusing on small to mid-cap equities, ultimately "retiring" in 2000 as a Managing Director of Investment Banking. Mr. Lacy has been involved in numerous investments, from arranging start-up capital for what became Petrohawk, which sold for $15 Billion, to mobile payments in India. Several long-time clients were founding investors of Cheniere Energy. Mr Lacy's decades in California technology includes arranging an early $13 million VC financing for "permanent ledger" software (now commonly known as "blockchain") led by top-tier fund Upfront Ventures. Other investments include 3D holographic display technology, early mobile applications, power conversion, along with multiple consumer health-related products: Canadian Glacier bottled water, Kinetin skin cream, a proprietary oxidative-stress formula, and UV purification systems. In 1989 Mr. Lacy hosted "the Venture Capitalist" which aired on (now) CNBC, and has followed the natural foods industry for 35 years. [NLINSERT]
1) Frederick Lacy: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: CV Sciences. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: None. Additional disclosure below. I determined which companies would be included in this article based on my research and understanding of the sector.
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Fincom Investment Partners Disclaimer
Prices as of close on 10/22/2018. This report is for informational purposes only and is not a solicitation of any security purchase or sale. Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, Fincom Investment Partners cannot guarantee its accuracy. Any opinions or estimates constitute our best judgment as of the date of publication, and are subject to change without notice. We recommend investors conduct thorough investment research of their own, including detailed review of the related Companies' SEC filings, and consult a qualified investment adviser. Fincom Investment Partners and its officers and directors own shares in the securities mentioned in this report and may buy or sell shares at any time without prior notice. Fincom Investment Partners has not been compensated for this report.
Chart provided by the author.