Hollister Biosciences HSTRF Stock With significant upside potential

Hollister Biosciences HSTRF Stock is in Hollister, CA.  They are just over the hill from Salinas, California, home to Lowell Farms.  I have wanted to check out Hollister Biosciences for some time.  Unfortunately, financial numbers were uninspiring, at best.  That just changed with the most recent revenue which more than doubled from $11M to $23M.  While other metrics lag behind growth like this, Hollister Bioscience’s it is a matter of economies of scale with higher output levels that will push margin and cost metrics to better levels.  Or, so one would assume. We have no official guidance for the coming three quarters remaining.  But, we do have a stated run rate that seems likely to be overrun.

While Hollister Biosciences has provided a nice investor presentation, and because I know a thing or two about that area of California (I am a Californian), you have to sort of twist the information to get a solid idea of what to expect.  This region of California produces excellent wine; it is just outside of the Monterey Bay area.  I assume this would translate to some very good quality cannabis but, I have not seen the correlation statistics.  However, from Lowell, we know that they had a tough time with drought last year, and that affected output.  This year appears to be even worse.  Bad news.

They have prominent brand collaborations that will likely do well including Easyriders and Tommy Chong.  They are also in the State of AZ which just recently passed adult-use cannabis.  As they state, this will significantly increase revenues.  The Venom brand is doing exceptionally well in Arizona and this puts Hollister squarely in a strong position.  I also wonder if this puts Hollister in a position to be acquired by, say, Curaleaf CURLF?

Hollister Biosciences HSTRF Stock Chart

Here is a look at the most recent chart for Hollister Biosciences HSTRF Stock:

Hollister Biosciences HSTRF Stock Financial Data

On its website, Hollister Biosciences has an investor presentation where they claim to have exited 2020 with a $54M run rate.  By who’s metric?  From what I can tell, this number is not even half what they will accomplish.  Here is the latest revenue chart:

A run rate is a 12 month period of time, (or, 4 quarters) where given projections you have an idea as to what the performance for a company is going to be.  Assuming that they “exited 2020” with a $54M run rate, I get from that they expect to print $54M for 2021.  This is usually what this means.  But, that would mean Hollister Biosciences has to nearly stop revenue down to about $10M per quarter over the next three quarters to achieve this.  My thinking is that revenue will blow out the $54M level.

If Hollister Biosciences were to increase revenues modestly over the next three quarters by, say 5% then, you could expect about an additional $75M printed for the rest of the year.  This assumes that the latest numbers are consistent with possibilities.  But, if this is the case then there will be significant improvements in the financials in the coming quarters.

Gross Margins

Gross margins are below average.  Mostly, you should be seeing a company print about 60% to 65% to be considered a top performer.  At this level, you can’t even pay the bills let alone get to profitability:

I’m genuinely focused on EBITDA profits with cannabis companies simply because there are so many that just got started.  Basically, you have top-line revenues.  Then, you have cost of goods that you would subtract from that (This gives you gross margins).  Then, you have operating costs that you subtract from what is left over.  This has to be positive to show that the core business is capable of being profitable.

The best companies print about 60% in gross margins.  If total operating costs were about 20% then, this would leave a good chunk of revenue for bottom line profits.  Margins are going to have to increase significantly in order to get there.

But, with increasing revenues, you get economies of scale and productivity gains that generally push gross margins upwards.  On the one hand, there was a big increase in revenue this quarter but, margins remained slightly flattish.  Over the next three quarters, it is very possible that Hollister Biosciences will start to print increasing gross margins.

Total Operating Costs

Total operating efficiencies are a mathematical equation of total operating costs over total revenues.  You want to see that the back-office costs are kept in check relative to revenues to justify total operating costs.  Here are operating efficiencies:

Scratch everything I just said about Hollister Bioscience’s gross margins.  Gross margins should be coming in far higher than they are.  At the same time, these are some of the best operating efficiencies I have ever seen.  When you see numbers this good usually they are one-offs.  But, the fact that the past four quarters have shown that this is a consistent approximation of what is going on with Hollister Biosciences.

Given that, this puts Hollister Biosciences as one of the lowest cost producers on an operational level I have seen.  That in itself is noteworthy.  I will continue to keep an eye on this metric to see if they maintain the same vigilance as revenues increase.

EBITDA & Net Income

Seeing how revenues jumped as they did, but gross margins were as low as they were, and, given that total operating costs were as low as they were relative to revenues, EBITDA should be interesting:

So, you have an increase in revenue that was more than 100% QoQ.  Gross margins were 15% of revenue.  Operating costs were 5%.  This left EBITDA coming in at 10%.  That is outstanding.  Period.  The question is, is it sustainable?

These metrics lay outside of relative norms so it is difficult to determine what sustainability could be here.  Hollister Biosciences has shown that on a relative basis operating costs are excellent.  And, Hollister is printing these metrics regularly despite these numbers being so far outside of the norm.

If this is the consistency that Hollister is going to produce then, imagine what the financial outlook looks like once Hollister gets its gross margins up to industry-average numbers.

Net Income

All of this leads to net incomes, which leads to EPS:

Wouldn’t you know it?  Hollister prints bottom-line profitability.

What I want to see is continued increases in gross margins, however.  This is where the real opportunity lay with Hollister Biosciences.

Is Hollister Biosciences HSTRF Stock A Good Buy?

I had a follower reach out to me to point out the outsized revenue gain for the quarter for Hollister Biosciences.  Whereas previously I did not find anything too motivational with Hollister, I am definitely intrigued by its numbers now.

Gross margins are paltry.  But, that does not seem to matter seeing how on a relative basis operating costs are so draconianly low.  The pass-through effects of such low margins make it so that not only is Hollister Biosciences EBITDA profitable but, net income profitable.

The only question is the sustainability and consistency of this company’s metrics.  In the investor presentation, Hollister stated that they exited 2020 on a $54M run rate.  What does that actually mean?  If they printed $54M in 2020, which they did not, then just state the final print for the year.  If they are in a $54M run rate for 2021, then print state that for 2021 instead of bringing in the 2020 timeframe.  It’s confusing.

Hollister Biosciences HSTRF Stock Base-Case scenario

Hollister Biosciences has some 305M shares outstanding.  If they continue to print revenue at this very same level and can move gross margins upwards, this puts Hollister Biosciences into the category of significantly undervalued.

Given the potential run-rate of $75M more for the remainder of this year, if Hollister were to push gross margins up to 25%, a level that would be merely sub-par, this could put $10M into the bottom line.  This is an EPS of $.0328 for the year.  At a 100x future earnings multiple this pushes the stock upwards 10x from its current level.  I could see that occurring.

But, the metrics leave you scratching your head.  They boggle the mind.  No other company is printing total operating costs in single digits consistently.  And, as for gross margins, even Canopy Growth is better off than Hollister Biosciences.  Yet, Hollister is also printing net income.

There is something else: I believe that Hollister could easily get acquired by a far bigger cannabis company.  Over the next two years, I expect significant M&A activity.  I could easily see Hollister getting mixed up in some kind of deal that adds value to shareholders in a win-win outcome.  This, alone, would drive the share price higher.

Bottom line, as long as the metrics continue to print the way they do HSTRF goes up.  If they continue to print profitable quarters on the back of exceptional cost metrics this will only draw in more buyers to the stock.  But, can they continue to print these eye-popping numbers?  That is my only concern.