KushCo Holdings (KSHB) has lagged most of its peers in the past months, as some internal problems and the weakening sentiment for the broader market has caused investors to run to safer plays.
That combined with the industry taking a black eye from the CannTrust debacle and fall from favor of Canopy growth, as resulted in the company struggling to gain momentum.
Consequently, it has one of the most inexpensive forward price-to-sales ratios in the cannabis sector based upon consensus sales of $242.5 million next year, making its valuation under 1.8x 2020’s projected revenue.
While the industry and the company aren’t out of the woods yet, KushCo is positioned to make a nice upward run when sentiment changes.
Internal challenges
A couple of things that have weighed on the company are its need to restate its accounting results, and its fairly recent failure to meet delivery expectations concerning compliant packaging to the Canadian market, which was part of the reason for a bottleneck in the supply chain.
What happened concerning the accounting errors was the company had to restate its 2017 and 2018 financial results, causing the market to rightfully question the capability of management.
Taken together with some of the negative issues associated with the cannabis industry, along with growing concerns over whether or not the economy is slowing down, it has brought about a disproportionate response from the market toward KushCo, in my opinion.
With its fast-growing vaporizer segment and increasing its hydrocarbon gases and solvents unit, the company has diversified its portfolio to the point any weakness in one unit should be offset by strength in another.
The good news to me is the issues KushCo has faced shouldn’t have any problem being solved. That’s important because its vaporizer unit should enjoy increasing sales from the Canadian market in 2020 after Canada allows sales of derivative products, of which vaporizers is one of the more popular.
That and the highly fragmented compliance requirements in various municipalities in the U.S., provide a solid long-term growth opportunity for KushCo. Even if there is eventually more uniformity concerning future requirements, it’ll take a long time to play out.
Also, it works with cannabis growers in 25 countries concerning packaging and branding compliance, making it a potentially very lucrative segment to compete in.
Canadian derivatives
Even though a number of derivatives will be legalized in Canada during October, it’ll take until the last couple of weeks of December 2019 before they will be rolled out. For that reason KushCo and others won’t get much immediate benefit from it until the first calendar quarter of 2020.
With a solid vaporizer unit, KushCo is well positioned to generate significant revenue from legalization in the Canadian market, as it’s one of the more popular ways to consume cannabis in the country.
This should help the bottom line of KushCo, which in the last quarter fell to a net loss of $10.6 million, down from the $9.2 million loss in the same reporting period last year.
The reason why that should improve is vaporizers and other derivative products command higher prices and margins.
With its consistent revenue growth, which in the last quarter soared to $41.5 million, a gain of 221 percent year-over-year, the company would get a huge boost in its share price if it is able to continue to grow sales while showing a clear path to profitabilty in the not-too-distant future.
As for its hydrocarbon gases and solvents division, that will probably take longer to grow, but with gas in particular being used in the production process of oils – which also generate higher prices and margins – the company has a connection to the oils market that should be a solid niche market in the future.
Conclusion
KushCo has been a victim of its own accounting errors and temporary failure to deliver on expected compliant packaging in the past. I think both of those are easily solvable, and we should hear from the company that they are problems it has solved.
The cannabis market is still under some pressure from the various perceived economic issues at the global level, but it appears the sentiment is improving some, and once that turns around and the market starts to see the potential growth trajectory of KushCo, along with the supplying of new products that will bring it closer to profitability, it’s going to be considered one of the most undervalued cannabis stocks available.
As the cannabis market sits today, which should last long into the future, KushCo, assuming it executes well, has the product lines in place to enjoy a long upward growth in sales, which will ultimately be done at a profit. I think patient investors are going to be rewarded well.
The one caveat is it must show it has control of its accounting numbers in the future. Any further failure there would make it hard for the company to retain faith in its competence.
