Charlotte's Web – The Hemp Stock ready for Take Off.

Charlotte's Web is the world's leading CBD producer by both market share and brand awareness. Already dominating the US with over 14% market share, and bucking the trend by being highly profitable, Charlotte's Web produces best-in-class hemp-derived CBD wellness products that treat a variety of conditions, including stress, insomnia, and inflammation relief.

The company, founded in 2012 by the 7 Stanley Brothers (Joel, Jesse, Jon, Jordan, Jared, Josh and…Austin – yeah not sure what happened there either), has a fantastic story behind their name. Forbes said it best.

Like her fictional namesake from the classic children's book, Charlotte's Web was named for real-life child heroine, Charlotte Figi. Young Charlotte suffered from several seizures per day due to Dravet syndrome (previously known as severe myoclonic epilepsy of infancy) until she was treated with the oil that evolved into Charlotte's Web.

On August 30, 2018, Charlotte's Web became the largest Hemp IPO in history, when it raised $115 million at CAD$7 per share. Since then, the stock has been on a tear.

With the recent passing of the Farm Bill, the CBD sector in the US is set to boom. The Brightfield Research Group estimates that the CBD market in the US could be worth as much as $22 billion by 2022, and Charlotte's Web is one of the best ways to play this coming CBD green rush.

 

Let's start with their Product Range

Their products are manufactured from proprietary strains of whole-plant hemp extracts, containing a full spectrum of cannabinoids, including CBD, terpenes, flavonoids and other less significant but valuable hemp compounds.

 

The products, most commonly in the form of liquids, capsules and topicals, contain none of the THC psychoactive ingredients found in Hemp's cousin – marijuana – and have anecdotally been used for the relief of stress, inflammatory pain and for the treatment of mild insomnia.

In 2019, Charlotte's Web aims to branch out into consumables, pet offerings, and cosmetics.

Their hemp is home-grown in the US from two primary locations. The first is their own farm in Colorado, and the second, via their contract farming agreements in both Kentucky and Oregon.

The company is a fully vertically-integrated operation, with all extraction, production, and processing, done in house. This has allowed them to develop proprietary systems particularly as they relate to extraction and isolation which, in conjunction with advanced technology, have allowed them to continue to increase their production yield.

The result, a recently-announced 10x increase in yield, and a harvest of just over 675,000 pounds. Achieved by planting and harvesting almost 300 acres of arable land (as opposed to the 70 acres and 63,000 pounds harvest in 2017).

Charlotte's Web also has a 40,000 square foot Current-GMP certified manufacturing facility, which can be expanded, for future production capacity, to 130,000 square feet.

Charlotte's Web is a proudly US-based, US-focused, company, which has resulted in an almost insurmountable 14% share of the total CBD wellness market in the US.

Their product range is now distributed throughout the US by over 3,500 retail stores, but the amazing part is that in the first 9 months of the 2018 Financial Year, nearly 60% of their revenue came through their own online e-commerce portal.

This gives Charlotte's Web the power to significantly control their margins and this is clearly evidenced in their most recent quarterly filings.

 

Their financial performance

 

Their recent 2018 Year to Date results have been phenomenal. For the 9 months ended 30 September 2018, they generated revenue of $48 million, a 75% increase in year on year sales growth. To put this in perspective, their full year 2017 revenue was $40 million.

With Gross Profit of $37 million, Charlotte's Web is operating at gross margin levels in excess of 77%. As a result, they were also able to show record EBITDA of $16.2 million (which equates to 34%). The growth is even more surprising when you consider that they have been stockpiling inventory for a while now, as they completely relaunch their new packaging across the range.

Sales would have been higher, had they not been holding the new stock back. Add this inventory to their record harvest, and they have enough inventory to meet 2020 revenue projections. Yeah, you read that right.

The launch of the new packaging has come with a significant increase in Sales and Marketing expenses, but we are entirely comfortable with this, given their increasing market share and the need to be continuously probing for growth.

With $79 million on the Balance Sheet, Charlotte's Web are well capitalised, and placed for significant growth opportunities in 2019. These opportunities should materialise as they grow their retail distribution reach, and bring new products and channels to market.

 

One area of growth that Charlotte's Web does need to focus on would be their international. expansion. The CBD boom is on its way – no doubt of that – and hence grabbing additional market share and footprint is going to be critical if Charlotte's Web wants to maintain their "industry leading" status. This is an area that Elixinol is currently beating them on.

The company has a strong and experienced management team. Led by Hess Moallem (CEO) and Rich Mohr (CFO), and was recently strengthened with the hire of Eugenio Mendez as Chief Growth Officer.

The former Coca-Cola VP of Water and Sports Drink division (one of Coke's fastest growing divisions), will most probably be charged with growing the beverage product range – an area that many see as the biggest growth driver for CBD in 2019.

 

The Bottom Line

This is one of the most profitable, most scalable businesses in the hemp space right now. In addition to that, it currently operates as market leader, with the most respected and well-known range of products in the market.

They are simply a best in class, in the industrial hemp-based CBD wellness market. Their prospects for 2019 remain bullishly optimistic. The passing of the Farm Bill of 2018, has lifted the prohibition of hemp-derived CBD products, and officially opened up the entire US to the #1 player in the US.

With new packaging hitting the ever-increasing number of retail shelves, and new products for pets and cosmetics due later in the year, this highly profitable company is excellently positioned for growth.

If anything, one could point to their market cap and suggest they are a little overvalued. But that's now, and we don't value companies only on the now. We take into account the runway in front of them, to gain momentum to take off.  And Charlotte's Web has all the runway in the world!

Take your seats people, the captain has turned the hemp-seatbelt light on for take off.

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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