The recent confirmation of the Blue Wave U.S. government thrust cannabis stocks back into the spotlight. Now with an increased chance that both medical-use and recreational cannabis could be legalized nationwide, traders are scurrying again to scoop up cannabis-related stocks.
Nowadays there are many cannabis producers and equipment companies lined up to grab a piece of the action. Then there are some more obscure fringe players like KushCo (OTCMKTS:KSHB), an emerging $152 million market cap company that plays a unique role in the legal cannabis ecosystem.
What Does KushCo Do?
Formerly called Kush Bottles, KushCo is one of the first companies to plant its seeds in the cannabis sector having been around for more than a decade. The company provides ancillary products and services to more than 100 cannabis and CBD growers, processors, distributors, and retailers globally. This includes packaging, papers, vaporizers, food-safe oils, as well as mass retail execution and merchandising for CBD stores.
With customers in North America, South America, and Europe, KushCo has formed some valuable relationships with many of the top cannabis brands. Its core vaporizer and technology division, which accounts for 60% of revenue, does business with some of the world's leading processors and retailers selling hardware, cartridges, pod systems, and batteries. KushCo entered this business back in 2017 because customer trends suggested vaping will be fastest growing cannabis category.
KushCo is also in the equipment financing business after acquiring a 20% stake in XS Financial last year. This diversifying strategic partnership is expected to become a bigger part of the business over time as growers and processors seek cost effective means of adding equipment to keep up with demand.
How is KushCo's Financial Performance?
Like most cannabis related companies, KushCo is operating at a net loss with spending outpacing revenue at this stage. Over time, however, this trend is likely to change.
The company's October 2020 fiscal Q4 report marked the first time in more than three years that it had positive adjusted EBITDA and cash flow. Then, in the first quarter of the new fiscal year, the positive adjusted EBITDA repeated. KushCo's revenue declined 23% to $26.8 million driven by a sales decline in recreational states during COVID-19, but the $0.03 per share loss was narrower than the $0.09 loss posted in the prior year period. It also marked the 7th straight quarter of 20%-plus gross margins which bodes well for the bottom-line improvement as the company achieves scale.
For the full year management is expecting revenues to be up 27% at the midpoint to $145 million and adjusted EBITDA to be in the neighborhood of $6 million. This represents significant swing from the $23 million adjusted EBITDA loss of fiscal 2020. Analysts are forecasting that KushCo may turn the profitability corner as soon as next year.
Why is KushCo Stock a Buy?
After making a run north of $8 KushCo stock is trading back below where it debuted on the over-the-counter exchange five years ago. But with cannabis industry fundamentals improving and the prospects for further legalization at the state or even federal level, the timing looks right to take a shot at this speculative play.
At $1.15 per share there seems to be far more upside than downside here. Corporate insiders seem to think so too. In November 2020, there was a healthy amount of insider buying activity and there has been no insider selling over the past year.
Meanwhile the Street also has a favorable opinion on the stock. Three of the four analysts call KushCo a buy including Roth Capital which gave the stock a $2.25 target earlier this week which suggest the stock could be a double.
Of course, as many OTC stocks do, KushCo could opt for a reverse split in the hopes of being uplisted to a major exchange. This would likely be viewed negatively in the short-term but could send the stock higher longer term due to increased investor awareness.
It would also not be surprising to see KushCo get bought out at some point. Many think the recent Aphria-Tilray may have ignited a consolidation wave in the cannabis space causing companies to scramble for scale and competitive positioning in the up-and-coming space. It would certainly be conceivable for a cannabis producer to snatch up a supplies company like KushCo to diversify and improve its operating leverage. On its own merits KushCo is a worthy, albeit very risky investment for those looking for a bit different way to play the potential cannabis boom. At 1.4x sales investors can get a company that is transitioning to positive cash flow in a large market that is growing like weeds.
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