TGODF or CVSI: Which is the better value?
There are so many publicly traded cannabis stocks these days. There is no shortage of capital flowing into the business. If you are a startup company with limited resources, simply do a reverse merger with an existing shell company, change the name to anything that contains the word cannabis and off you go.
It is common for a startup company to have a heavily debt-leveraged balance sheet. Not so with many cannabis companies. Until the recent Canadian legalization, lenders (read banks) were loth to work with weed companies. But with high stock prices and existing shareholders willing to accept dilution, who needs to borrow money these days?
With financial backers so eager to get a piece of the gold, it is virtually impossible for the price of cannabis equities to reflect fundamental reality perfectly. Take the case of The Green Organic Dutchman Holdings Ltd (TGODF) and CV Sciences Inc. (CVSI) as just one example among many.
Comparing these two mid-size “healthcare” companies, the most important question: is TGODF with a market cap just under $1 billion worth nearly twice that of $465 million CVSI? There is a reason for choosing these two companies. They may be in the same business, but the forces that shape stock prices could not be more different. So let's take a look.
What they have in common
For most of its history, The Green Organic Dutchman Ltd. operated as a cannabinoid-based research and development company in Mississauga, Canada. It produces organic cannabis products, including organic dried cannabis, cannabis oils and edibles, fresh cannabis, and seeds for medical applications.
The latest report covering the six months ending September 2018 shows almost no operating revenues and a loss of CA$27,000 ($20064.91). Capacity is under construction that will eventually lead to 219,000 kilos of annual production. How soon this peak will be reached is a guess. For the sake of discussion, let’s say sometime after 2020.
In the world of organic cannabis, it is relevant to bring up the extraordinary price paid for Whistler —$132 million— by Aurora (ACB) back in January. For that price for just 5500 kilos of production. If that were not enough, ACB paid another CA$24.6 million ($18.28 million) in stock for the 19 percent of Whistler, heretofore, owned by Cronos Group (CRON).
Since January, the shares of Green Organic have been a top performer appreciating more than 70 percent since New Year’s Day. That represents an impressive move even considering the approximate 50 percent gain for most cannabis indices and ETFs. This suggests there is a possibly sizable takeover premium embedded in Green Organic’s current price. That creates a special risk for current shareholders.
Now let’s take a look at CV Sciences, Inc. a self-described life science company that has been around since 2010. These folks operate two segments: Specialty Pharmaceuticals (SP) and Consumer Products (CP).
SP focuses on developing prescription drugs utilizing synthetic CBD as the active ingredient. Its initial drug candidate was CVSI-007 that combines CBD and nicotine for the treatment of smokeless tobacco use and addiction.
Consumer Products contain plant-based CBD under the PlusCBD Oil brand name in various market sectors, including nutraceutical, beauty care, specialty foods, and vape.
We could not find CVSI production capacity, but we did find their financials. There are pretty impressive especially compared with Green Organic. For starters, revenues through the first nine months point the company toward $50 million for the full year 2018.
CVSI is not only profitable; they are highly profitable. Gross profit margins are over 70 percent, and net income is over 20 cents on every dollar of sales. When the company finally gets around to reporting final 2018 numbers, earnings are likely to be at least $0.12 per share.
Here are the choices
At this point, you can understand why these two companies offer investors two distinctly different choices. They may be in the same business, but that offer hard choices. Should you invest in the organic-focused company with major capacity planned for the future but a possible big takeover price built into the current valuation?
Or should your appetite for risk be tempered in favor of CVSI with significant revenues that are growing rapidly and with exceptional profitability? Selling at half the market cap of Green Organic weighs heavily toward CVSI.