KeyStone’s Your Stock Our Take: Charlotte’s Web Holdings Inc. (CWEB:TSX), and SS&C Technologies Holdings Inc. (SSNC: NASDAQ), STAR: GlobalSCAPE Inc. (GSB:NYSE).
This week in our Your Stock Our Take Segment, we first answer a listener question on Charlotte’s Web Holdings, Inc. (CWEB:TSX), a “seed to sale”, vertically integrated Cannabis company involved in all stages from production to distribution of innovative hemp-derived cannabidiol (CBD) wellness products. With the shares cut in half over the past 5-months, is this Cannabis company on-sale?
Our second Your Stock Our Take question is on SS&C Technologies Holdings Inc. (SSNC: NASDAQ), which provides software products and software-enabled services to customers primarily in the financial services and healthcare sectors. A listener asks if the strong growth in recent years makes the stock a bargain today?
Finally, Our Star of the Week is GlobalSCAPE Inc. (GSB:NYSE), provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. The stock was up around 15% last week and up 192% year-to-date. We let you know what is driving the jump.
Your Stock, Our Take
Charlotte’s Web Holdings, Inc. (CWEB:TSX)
Current Price: $12.28
Market Cap: $1.21 billion
What does the company do?
Charlotte’s Web is a “seed to sale”, vertically integrated Cannabis company involved in all stages from production to distribution of innovative hemp-derived cannabidiol (CBD) wellness products. Founded by the Stanley Brothers, the company’s premium quality products start with proprietary hemp genetics that are responsibly manufactured into hemp-derived CBD extracts naturally containing a full spectrum of phytocannabinoids, including CBD, terpenes, flavonoids and other beneficial hemp compounds. Industrial hemp products are non-intoxicating. Charlotte’s Web product categories include CBD Oil tinctures (liquid products), CBD capsules, CBD topicals, as well as CBD pet products. Charlotte’s Web hemp-derived CBD extracts are sold through select distributors, brick and mortar retailers, and online through the Company’s website. The rate the company pays for agricultural products reflects a fair and sustainable rate driving higher quality yield, encouraging good farming practices, and supporting U.S. farming communities.
Recent Financials
Q3 revenue rose 41.8% to $25.1 million from $17.7 million for the same period in 2018. Human consumables, topicals and pet products grew by 43.6%, 156.7% and 57.5%, respectively. GOOD GROWTH
Adjusted EBITDA for the third quarter was $0.7 million or 2.8% of consolidated revenue compared to $5.3 million and 29.9% of consolidated revenue for the third quarter of 2018. The lower Adjusted EBITDA ratio during the third quarter reflects investment in infrastructure and personnel as the Company builds its internal capabilities to support expected future revenue growth from the FDM channel.
While the company has a solid net cash position, Charlotte’s Web $24.8 million of cash in operations during the first nine months of 2019 – lowering its net cash significantly and suggesting the company will continue to need further cash.
In fact, this week, the company announced it had closed another round of financing.
Finally, Charlotte’s Web recently downgraded its full-year 2019 revenue to the $95 -$100 million range. Growth rate forecasts for 2020, in terms of revenues were moderated to the 40%-50% range, until clear regulations are set.
Our Take:
Charlotte’s Web continues to produce strong revenue growth and appears to have a growth path ahead of it. However, the company’s weak adjusted EBITDA and lack of profitability in Q3 coupled with a downgrade in its guidance near-term provide significant near-term uncertainty. Adding to this uncertainty, Charlotte’s Web announced it became aware of a yet-to-be served class-action suit having been filed in the Northern District of California that alleges that the company’s products are mislabeled as dietary supplements. Management believes that its products are accurately labeled and that the claims are without merit. Charlotte’s Web intends to vigorously defend itself against any such suits, however, this adds another level of risk near-term. Finally, from a valuation perspective, despite the company’s 57% share price drip from late July, Charlotte’s Web still trades at over 40 times EV/EBITDA – high multiple even with the growth.
We continue to see the Cannabis sector as generally pricy, and while Charlotte’s Web is one of the more promising names, valuations remain on the higher end and we see better value in 1-2 other select names in the segment which we recently released coverage on. We continue to monitor Charlotte’s Web.
Your Stock, Our Take
SS&C Technologies Holdings Inc. (SSNC: NASDAQ)
Current Price: $59.15
Market Cap: $14.9 billion
What does the company do?
SS&C Technologies provides software products and software-enabled services to customers primarily in financial services and healthcare sectors. On the financial services side, the company’s clients include asset managers, banks, and financial advisors. Services include fund administration, portfolio accounting, portfolio management, trading, banking/lending, and other software services. On the healthcare side, SS&C provides pharmacy health management solutions and medical claim administration services.
Recent Financial Results
Q3 2019 Financials (November 7th):
- Quarterly revenue was up 15% to $1.1 billion.
- Adjusted operating income was up 12% to $425.6 million.
- Adjusted earnings per share (EPS) was up 18% to $0.93.
- Ended the quarter with approximately $8 billion in debt.
- SS&C announced the acquisitions of Investrack on September 12, 2019, and Algorithmics on September 25, 2019, for undisclosed amounts.
Guidance:
- Full year 2019 revenue: $4,610.6 million to $4,640.6 million.
- Adjusted EPS: $3.68 to $3.75 (year over year growth of approximately 26% / Adjusted EPS was up 51% in 2018).
Financial Ratios:
- Debt/EBITDA: 4.05
- Debt/Equity: 1.65
- Price/Earnings (2019e):16
Our Take:
SS&C Technologies has been reporting fantastic growth in recent years. On an adjusted, non-GAAP basis, earnings are increasing well into the double digits. In addition, the valuation of 16 times adjusted EPS for 2019 is actually quite attractive. A next step in the research process would be to conduct a detailed analysis on exactly how a company adjusts their earnings and whether or not these adjustments reflect the real economic value, or cash-based earnings, which are being produced by the company.
But one thing I don’t like about the company’s financial picture is the balance sheet which has nearly $8 billion in debt. One way we analyze the balance sheet is by looking at key leverage ratios like debt-to-EBITDA which measure the debt level relative to operating profitability. SS&C’s debt-to-EBITDA ratio is over 4 times which we would consider to be high. There is no specific number that we are looking for as an appropriate debt level depends on a variety of different characteristics. However, within the software technology space, we would be looking for the ratio to be generally below 2 times, which would imply that SS&C’s debt balance is more than twice our max target level. In many cases, the software technology company’s that we’ve recommended have little to no debt and large net cash balances.
Overall, I think that SS&C is an interesting stock and probably deserves a deep analysis. I don’t know if I could get past the debt level but the growth and valuation look compelling.
Weekly Star
GlobalSCAPE Inc. (GSB:NYSE)
Current Price: USD$13.04
Market Cap: USD$226.52 Million
Star Performance:
The stock was up around 15% last week and up 192% year-to-date.
What does the company do?
GlobalSCAPE, Inc., together with its wholly owned subsidiary, provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. GlobalSCAPE’s primary product is Enhanced File Transfer, or EFT.
The company’s solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements.
What is driving the stock?
Two things appear to be moving the stock, with the first being some headline news boosting optimism and the second being the company’s healthy Q3, 2019, financial results.
So to address the headline news, on November 18th, 2019, the company announced the establishment of a $55 million credit facility with J.P. Morgan and East West Bank. In conjunction with this news release, GlobalSCAPE’s Board of Directors authorized and declared a special cash dividend of $3.35 per share and a repurchase program of up to $5 million of the company’s outstanding shares.
Financial Results (October 24th, 2019)
Q3 2019
- Revenue increased 12.8%, to $10.1 million compared to the same quarter last year.
- Adjusted EBITDA increased 160%, to $5.2 million compared to the same quarter last year.
- Fully diluted EPS increased 280%, to $0.19 per share compared to $0.05 per share for Q3, 2018.
Conclusion:
Taking a look at the company’s balance sheet, they have no debt and a net cash position of $13.4 million. I also thought that it might be good to point out that their goodwill is quite large at $12.7 million, which represents around 32% of total assets.
I wasn’t able to find any guidance for the upcoming 2020 fiscal year, but on a trailing-twelve-month basis the company is trading at an EV/EBITDA multiple around 11x which appears to value the company at a slight discount to the market.
We like the cybersecurity space and do see potential in GlobalSCAPE. But right now, I think that it is smart to stay on the sidelines as it will be interesting to see how the company utilizes its new debt facility to grow and if they will be able to maintain growth going forward. Nonetheless, the recent positive news and financial results have allowed the company to claim our coveted status of Star of the Week.
