What Analysts Think about KushCo Holdings in Q1 2020

On January 2, KushCo Holdings’ (KSHB) share price rose by 3.05% to $1.69 on the US OTC (over-the-counter) exchange. However, its shares fell 71.23% from $5.70 on January 2, 2019, to $1.64 on December 31, 2019. The stock lost 7.86% of its value in December 2019. KushCo Holdings’ significant exposure to the vaping business played a major role in pulling down the stock in 2019.

In July 2019, the company filed an application for listing on the Nasdaq exchange. If successful, this move can diversify the company’s shareholder base as well as improve its share liquidity.

What analysts expect in Q1 of fiscal 2020

Analysts expect KushCo Holdings to report first-quarter revenues of $42.7 million, a YoY (year-over-year) rise of 68.64%. They project the company’s revenues to rise YoY by 45.27% to $51.1 million in the second quarter of fiscal 2020, 54.03% to $63.9 million in the third quarter, and 56.0% to $73.28 million in the fourth quarter of fiscal 2020.

Analysts also expect KushCo Holdings to become EBITDA-positive in fiscal 2021. They estimate the company’s first-quarter EBITDA to be -$5.7 million, a YoY improvement of 19.66%. Analysts project KushCo’s EBITDA to rise YoY by 47.79% to -$3.5 million in the second quarter, 81.36% to -$1.4 million in the third quarter, and 116.34% to $1.8 million in the fourth quarter of fiscal 2020.

Analysts have also estimated KushCo Holdings’ adjusted EPS (earnings per share) to improve 10% to -$0.09 in the first quarter. They expect the company’s adjusted EPS to improve YoY by 22.22% to -$0.07 in the second quarter, 62.5% to -$0.05 in the third quarter, and 88.46% to -$0.02 in the fourth quarter of fiscal 2020.

KushCo Holdings surpassed revenue estimates in the fourth quarter

In the fourth quarter, Kushco Holdings reported revenues of $47 million. This implied a YoY (year-over-year) rise of 135.31% and sequential growth of 13%. Its revenues also surpassed the consensus estimate by $1.18 million.

The company reported fiscal 2019 revenues of $149 million, a YoY rise of 186%. Its revenue performance was toward the higher end of the company’s fiscal 2019 revenue guidance of $145 million–$150 million.

KushCo Holdings reported double-digit sequential revenue growth in all four quarters of fiscal 2019. The company’s fourth-quarter revenues from medical marijuana were up 405% YoY and 89% sequentially. Its fourth-quarter revenues from sales of recreational marijuana were up by 96% YoY but 4% down sequentially.

In the fourth quarter, KushCo Holdings reported a GAAP gross margin of 20.1%, a YoY improvement of 200 basis points and a sequential increase of 230 basis points. The company has consistently improved its gross margins from its low of 13% in the first quarter of fiscal 2019.

The company also reported a non-GAAP gross margin of 22.1%. Its margins benefited from reduced land costs, supply chain efficiencies, and better utilization of fixed expenses.

However, the company’s GAAP gross margin for fiscal 2019 declined from 26% in fiscal 2018 to 17% in fiscal 2019. This drop was attributed to an unfavorable shift in sales mix toward the lower-margin vape products and increased tariffs imposed by China. The company now plans to impose a tariff supplement fee to offset the impact of increasing tariffs.

KushCo Holdings’ fourth-quarter GAAP EPS of -$0.13 was worse than the consensus by $0.01. The company’s fiscal 2019 earnings per share totaled -$0.57.

KushCo Holdings’ fiscal 2020 guidance

In the fourth-quarter earnings call, Kushco Holdings guided for fiscal 2020 revenues of $230 million–$250 million. This estimate mainly includes revenue contribution from the company’s core business as well as a $25 million contribution from KushCo’s new hemp and CBD (cannabidiol) businesses.

The company has assumed weaker revenue performance in the first half of fiscal 2020 due to lower sales of vape product sales. However, KushCo also expects its vape product sales to gradually increase in the second half of fiscal 2020.

KushCo Holdings expects robust revenue growth coupled with control on operational expenses to result in positive EBITDA in the second half of fiscal 2020. The company also expects an improvement in gross margin in fiscal 2020.

KushCo targets high-growth markets to boost revenues

In its fourth-quarter earnings call, Kushco Holdings highlighted its focus on the new markets of Illinois and Michigan. Besides the growing medical marijuana market, the company expects to benefit significantly from the legalization of recreational marijuana in Illinois on January 1, 2020.

The company also anticipates the legalization of adult-use cannabis in Michigan in March or April. KushCo Holdings reported revenues of $2.2 million from Michigan in the fourth quarter, up YoY by 681%, and sequentially by 88%. The company also reported $0.64 million in revenues from Illinois, a YoY rise of 1,332%, and a sequential rise of 88%.

KushCo Holdings is focused on the medical marijuana market in Florida and the stronger recreational markets of Colorado and Washington. The company reported $17.9 million in revenues in the fourth quarter from recreational sales in California. This is a YoY rise of 87% but a sequential decline of 15%. Despite this, the company believes California could be a major growth driver in the long term.

The company has attributed the short-term challenges in the market to weak retail infrastructure and a thriving black market in the state. The company is also facing challenges due to limited retail infrastructure in Oregon and Massachusetts.

Finally, KushCo Holdings is also targeting the Cannabis 2.0 opportunity in Canada. The company reported Canadian revenues of around $1.0 million in the fourth quarter. The company, however, has lowered the anticipated fiscal 2020 revenue contribution of Canada from 15%–20% to 10%–15%.

Which business segments could drive growth?

KushCo Holdings has been trying to reduce its revenue exposure to the vape products category. In the fourth quarter, the company reported vape sales of $31.7 million, a YoY rise of 186% and a sequential rise of 5%. The company’s revenue exposure to vape products has declined from 72.29% in the third quarter to 67.4% in the fourth quarter.

The company expects a slight decline in demand for vaping products in fiscal 2020, especially in the first quarter and second quarter. KushCo’s customers and retailers have reduced their vape purchases in the face of uncertainties associated with the regulatory framework.

However, in the absence of significant regulatory changes, the company expects these sales to spike in the second half of fiscal 2020. The company also expects the vaping crisis to prove to be a growth driver for the regulated cannabis sector in the long term. Besides, KushCo Holdings expects legal cannabis players to ensure a better safety profile for their vape products.

According to its fourth-quarter earnings call, KushCo Holdings is prioritizing higher-margin products and services such as hyper custom packaging, retail services, and hemp trading. The company expects its packaging business to gain momentum in the coming quarters. The company also expects its energy and natural products businesses to be a key growth driver in the long term.

In November 2019, KushCo Holdings announced the launch of its hemp trading business, thereby expanding its CBD footprint. According to its fourth-quarter earnings call, this business requires less excess capital but is highly EBITDA accretive. It can also prove to be a major competitive advantage for the company.

How analysts’ revenue estimates have changed for KushCo Holdings

Analysts first increased KushCo Holdings’ fiscal 2020 revenue estimates from $180 million in December 2018 to $243 million in July 2019. The fiscal 2020 revenue estimate fell slightly to $230 million in October 2019. Analysts now expect the company’s fiscal 2020 revenues to be $227 million, slightly lower than the company’s revenue guidance.

In January 2020, analysts expect the company’s fiscal 2021 revenues to be $321 million. In July 2019, they had estimated KushCo’s fiscal 2021 revenues to be $310 million. They increased the estimate to $317 million in October 2019 and then to $321 million in December 2019. Analysts also expect KushCo’s fiscal 2022 revenues to be $436 million.

How analysts’ EBITDA estimates have changed for KushCo

Analysts first reduced KushCo Holdings’ fiscal 2020 EBITDA estimate from $11 million in December 2018 to $2 million in July 2019. They revised the estimate downward to -$6 million in October 2019 and then -$10 million in December 2019. Analysts now expect the company’s fiscal 2020 EBITDA to be -$10 million.

In January 2020, analysts expect the company’s fiscal 2021 EBITDA to be $19 million. Analysts first increased their EBITDA estimate from $2 million in December 2018 to $28 million in July 2019. Plus, they reduced it to $16 million in October 2019 but raised it again to $19 million in December 2019.

How are analysts rating KushCo Holdings?

Nine analysts are covering KushCo Holdings as of January 3, 2020. The number of analysts covering the company rose from three in December 2018 to eight in July 2019. In October 2019, eight analysts covered the company, but the number rose to nine in December 2019.

The overall analyst sentiment for the company seems to have improved since December 2018. All the analysts have always rated the company as a “buy.”

In January 2020, three analysts rate KushCo Holdings stock as a “strong buy,” and six rate it as a “buy.” The rating mix is similar to that in December 2019. In December 2018, one analyst rated it as “strong buy,” and two rated it as “buy.” In July and October 2019, two rated it as “strong buy,” and six rated it as a “buy.”

Analysts gave KushCo Holdings stock a target price of $5.50, implying an upside potential of 229.34% compared to its last closing price. The target price first increased from $7.92 in December 2018 to $8.13 in July 2019. Analysts then reduced it to $7.19 in October 2019 and again to $5.50 in December 2019.