One of the biggest contrarian plays right now is in vaping. Cannabis company KushCo Holdings (OTC:KSHB) has seen its share price take a beating this year as a result of its exposure to the vaping market. There’s a lot of potential for the stock to recover if those concerns disappear, but it’s by no means a sure thing. That’s why investors need to do a careful analysis of the stock before making an investment decision…
There’s still no end in sight to vaping-related deaths
The biggest reason investors are likely hesitant to invest in KushCo today is the company’s exposure to vaping. Revenue from vape products made up more than two-thirds (67.4%) of the company’s sales in Q4. Vaping-related illnesses are still in the news, and as long as the issue isn’t going away, it could have a significant impact on KushCo’s financials. As of Dec. 5, 48 people have died as a result of vaping and nearly 2,300 people have been hospitalized. The issue is widespread, with people in every state becoming ill after vaping. And it hasn’t been just a U.S. problem, either, there have been similar cases in Canada and the U.K. The good news is that there has been progress, as health officials identified vitamin E acetate as the likely culprit behind the illnesses.
Until the issue is put to rest once and for all, it could spell bad news for the financials and outlook of a company like KushCo, since vaping is a big part of its business.
KushCo is a long shot to hit breakeven anytime soon
In November, KushCo released its year-end results for fiscal 2019. Revenue of $149 million was up 186% from the previous fiscal year, when its top line totaled $52 million. However, that didn’t translate into stronger earnings as KushCo’s operating loss grew from $27 million in fiscal 2018 to $45 million this past fiscal year. The company’s gross margin fell from 26% to 16%, resulting in just $11 million more in gross profit despite KushCo generating nearly $100 million more in revenue this year than it did in 2018.
Another area of concern for investors is KushCo’s cash on hand. The company had just $3.9 million cash on hand as of Aug. 31, which is a big drop from the $13.5 million it had a year ago. From an investor’s point of view, a lack of cash is a problem as KushCo could issue more shares to fund its operations, and that would dilute existing shareholders and send the stock price down even lower.
Vaping-related illnesses only make the situation worse, with KushCo acknowledging that the crisis will have an impact on its financials. In the company’s earnings release, KushCo stated: “We believe there will be some top-line softness in the first half of fiscal 2020 related to vape.” However, the company is optimistic that in the second half of the year, there will be a recovery.
KushCo has tried to downplay the impact from vaping, stating that it could lead to consumers simply shifting their purchases around:
While we have been seeing a slight pullback in sales for the overall vape market, it’s important to note that we service the entire regulated cannabis and CBD sector, and as a result, benefit from some consumers potentially shifting to other form factors, such as flower, edibles and pre-rolls.
The stock is still not a buy despite its low price
KushCo has been one of the hardest-hit marijuana stocks this year, losing more than 70% of its value year to date. For some investors, the ability to purchase shares of the company at well under $2 may present a tempting buying opportunity, but investors should consider much more than just price or valuation when making a long-term investment.
The low value of the stock is indicative of the risk involved and the concern investors have surrounding…
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