Neptune Wellness Solutions $NEPT is a company that if you simply looked at the financial charts you would think missed the mark by a wide margin. Not true. The recent drop in revenue is misleading if you do not look deeper. Neptune is transitioning from a company that dealt with extraction to more of a branded portfolio company. Neptune is leaving the dirty work of extracting THC & CBD to other companies and instead is focusing on building up their distribution network and brand identity. They are also acquiring key companies and bringing in top-shelf talent.
That being said, the future of Neptune’s financials, and most importantly its bottom line, looks very promising. And, I can build a case that any further dipping in the stock price is a strong buy.
For now, here is a look at Neptune’s chart:
As you can see, the February Reddit stock surge has been completely wiped out and then some. At this point, I can see $NEPT being fairly appropriately priced.
But, there are far more shares on the market as Neptune Wellness has done a bought deal at $2.00 per share for 27M shares bringing the total up to 119M. And, while this is dilutive, the good news far outweighs the bad news.
Here is a graph of the shares outstanding for Neptune Wellness:
Neptune Wellness Acquires Sprout Baby Foods
Neptune Wellness Solutions acquired a controlling interest (50.1%) of Sprout Foods, an organic baby food company. Is it just me, or a cannabis company acquiring a baby food company just seems a bit off. But, then again, when you look at everything involved it still does not make sense, but it increases the potential of the company in total.
First, by acquiring Sprout Baby foods, Neptune picked up an impressive partner. Morgan Stanley Expansion Capital (MSEC) was a large investor in Sprout Foods. Now, Morgan Stanley is a large shareholder in Neptune. Plus, Lincoln Isetta, a managing director of Morgan Stanley Expansion Captial, is now on the board of directors for Neptune. That is huge.
I don’t need to go into too much detail on this point, but when you begin to think about the connectivity of Morgan Stanley, Neptune’s prospects look very promising from that angle alone. Mr. Isetta will have the capabilities to make significant inroads in the distribution of products merely by looking through his contacts within Morgan Stanley. I see that as a very positive.
But, it is the acquisition of Sprout, and what it brings to the table that when you look at Neptune, you start to paint a very big picture.
Sprout Foods Addition
First, Sprout will add in $28M in revenues annually, immediately. The average net earnings for the S&P 500 is 14%. If we were to assume that this baby food company was performing on average, then this would be an additional $0.033 EPS. At a 34x multiple, the average for the S&P 500, NEPT would be sitting at $0.58 per share. Currently, it is at $1.58. This is just one aspect of Neptune’s prospects.
Neptune Inks $100M Sales
The next thing I want to look at is the recent revenue projection that Neptune guided for. Neptune has purchase orders of some $100M. Neptune has been vetting out who they are distributing to with its various products. And, given the $100M in open purchase orders, this shows the future capabilities of Neptune. These purchase orders are spread out over 6 different companies, which is an aspect that I like a lot simply because this allows for more diversity in its sales.
From that, given the very same mathematics above, if Neptune were to in fact sell $100M in product over the course of the next 12 months, and given a 14% average earnings multiple, this adds $14M to the bottom line. Again, there are 119M shares to spread those earnings around. That puts $0.11 EPS into each shareholder’s account. And, given that this is cannabis, we can up the future earnings multiple by some 50%, bringing the 50x earnings to $5.50 per share. If you add in the Sprout revenue and forward multiple, this brings the stock potential to about $6.75 per share. NEPT is currently trading at $1.50 per share.
Neptune Wellness Solutions Revenues
By thinking ahead, you can begin to dismiss the current financial numbers that Neptune Wellness just printed. Nonetheless, to give some perspective, here is the latest revenues chart:
First, the $21.5M was largely a one-off in revenues simply because Neptune was transitioning away from the previous model of wholesale extraction. Given that, we cannot even look towards previous numbers simply because there would not be any comparison to the new direction.
Nonetheless, if Neptune were to begin to bring in the revenue from just Sprout, this adds in about $6.4M per quarter. That pushes revenues up to $9M which would already push above the recent trendline. This is important simply because current sales of its current portfolio of products will have cost and so associating cost metrics along with revenues gives us a baseline to work with.
Neptune Wellness Operating Costs
Here is a chart on operating costs:
I wanted to lay out what it may look like if Neptune Wellness did in fact hit its $100M in product revenues. The very best companies are hitting approximately 60% – 65% in gross profits. That puts some $60M from cannabis sales into the register for Neptune. Keep in mind, excluding operating costs from Sprout would be necessary because Sprout will have its own facility and costs. However, there are synergies and distribution capabilities that will bring in cost savings.
Focus On Branding
As I mentioned, Neptune’s shift is towards just manufacturing, distribution, and branding of their products. They were focused on extraction but, this has proven to be a low-margin avenue for cannabis producers. Instead, the higher margins in the industry are with branded products.
I have seen time and time again where reports from companies show they are shifting out of the wholesale side of cannabis production into premium product production where a respective company pushes its own product brands. Margins are far greater.
So, by focusing on its own premium branding and leaving extraction to other companies, Neptune will be able to build itself a solid product portfolio while simultaneously producing a higher-margin product.
Neptune Looking Forward
The products that Neptune has in its portfolio are already seeing significant interest and sales. The $100M in purchase orders gives a concrete idea of what the potential could be in a short period of time. It is important to note that revenues from this purchase order are already starting to show up. However, there have been delays in distribution because of COVID.
I wanted to put together a simple break-down of what Neptune will potentially be doing in the future. Its purchase orders and the acquisition of Sprout enable solid distribution and product revenue increases. While I still scratch my head as to why a cannabis company would want to purchase a baby food manufacturer, bottom line is that it works.
There are synergies and cost savings that both companies will be able to employ and add shareholder value. Plus, getting Morgan Stanley on the company board is more than the proverbial feather-in-the-cap. The resources that an individual as high up as a Managing Director at Morgan Stanley can bring are vast and promising.
I can easily see NEPT climbed above $6.50 per share in 1 year’s time. This would be an increase of some 300% in that period of time. And, then there is far more to go as Neptune builds upon its success and grows the company.
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