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Neptune Wellness NEPT Stock Forecast & Analysis

Neptune Wellness NEPT stock was a Canadian cannabis company that turned into a holistic wellness brand company when they acquire Sprout Organics.  Now, Neptune Wellness is more of a wellness brand company that will be in some 90% of US organic baby food distribution; up from 50%.  They are also in Walmart for distribution with a total of some 20,000 retail locations they are distributing in.  Effectively, they have become a wellness brand that is also a sells cannabis whereas before they were an expanding cannabis company.

On the surface, when the newly appointed CEO Michael Cammarata converted the company into its organic baby food line, I felt this was a pet-project approach.  But, when you look down the road with a timeframe of many many years, there is something here.  Most cannabis companies are likely to branch into other wellness types of products, expanding distribution networks and building a sound foundation.

But, the focus on non-cannabis expansion is at the expense of the once-in-a-lifetime opportunity to expand into a product line that is being newly legalized with significant demand after a century of prohibition.  Still, there are significant merits to expanding.  And, the fruits of this labor are starting to show up on the top line of the financial reports.

Neptune Wellness Company Comparison

Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:

#41 Market Cap: $56.5M
#18 Revenue Growth Rate: 17.7%
#71 Gross Margins: 11%
#58 Operating Efficiencies: 113.7%
#62 EBITDA/Revenue: -108.1%
#11 Cash/Debt Ratio: 72%
#26 Total Assets: $112M

I compare all cannabis companies to each other in my complete list of cannabis companies.  The above numbers do not tell the story of future growth for Neptune Wellness.  These numbers say where Neptune currently is, not the rapid expansion that is about to ensue.

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Neptune Wellness Latest Financial Release

Neptune Wellness NEPT Stock - Is NEPT stock a good investment for you cannabis investments

Here is a breakdown of Neptune Wellness Q3 financial data.

Neptune Wellness Gross Profits

First, I convert all data into USD as the numbers were reported otherwise.  Given that, there are three consecutive increases in revenue in the past three quarters.  And, you should expect further increases.  Neptune Wellness has expanded its distribution in the United States to now access some 90% of the organic baby food retail outlets; up from 50%.  In the next two quarters, Neptune Wellness will start printing these numbers.  But, this is organic baby food that is most likely to see the surge in revenue.  It is still revenue.  This has more to do with the expansion of its baby food line.

But, cannabis is newly legalized around Canada and the US.  Demand for Neptune Wellness is high in Canada where they sell products; they are in some 1,100 distribution stores in Canada. This has the potential to grow more and more as time moves forward.

What I would want to see is a partnering up in the US with a US MSO that can distribute Neptune Wellness products in whichever stores they own.  Neptune Wellness has demonstrated that they can connect and get products in retail stores.  This will extend to its cannabis products.  This kind of experience & drive that Cammarata brings will be valuable.

For now, as you can see, gross margins are finally positive for the first time in many quarters. Expectations are for a move higher in revenue to about $80M annually, up from $50M; about a 60% increase.  The next level of revenue has the ability to be higher on a marginal basis and this should drive up gross margins to respectable levels.

Neptune Wellness Operating Profits

As you can see, operating costs are fairly consistent.  If there are incremental increases while there is a 60% increase in revenue, the numbers could produce operating profits in the lowest percentile, pushing Neptune Wellness into a leadership position.  But, oftentimes increases in revenue come by increasing sales in the SG&A.  So, I would expect that the increase in revenue will also see an increase in sales costs.  But, the future $80M has the ability to cover these costs.

Neptune Wellness EBTIDA & Net Profits

Profitability?  Not even close at this stage.  However, push revenues upwards by 60% to the target of $80M next year, and all of a sudden the story changes.  I mention this often that costs are covered by the initial revenue.  Then, additional units moving through the system will have an outsized effect on margins.

If you have $10M in a quarter in revenue, but, all of the costs for producing a product also cost $10M, including rent, electricity, labor, unit input costs, packaging costs, et. al, then you break even.  But, assuming you push through 10% more products through the system, the only costs you would have would be unit input costs, labor, maybe a smaller increase in electricity, and other costs.  But, the rent, which could be very high compared to the first $10M in revenue, is already paid for by that initial $10M in revenue.  That means margins on the additional units after these initial costs will be outsized.

Read: There will be rapid increases in improvements in margins.

Neptune Wellness Cash On Hand

There is ample cash on hand.  But, there is also a solid amount of debt.  So, this could become problematic.  There are two ways to increase cash on hand for working operations; debt & issuing more stock.  Looking at the total equity, which is next, tells us that something needs to happen.

Neptune Wellness Total Equity

Because of the decline in total assets, total equity has taken a hit and declined.  The good news is the pending increase in revenue that can substantiate taking on more debt to bring in cash; raising total assets by whatever number necessary.  But, Neptune Wellness will have to spend that money over the next few quarters until they achieve net earnings positive status.  That would dwindle assets and maybe push equity negatively.

It may be that Neptune both increases debt via financing as well as issues stock.  That would be something that will dilute shareholders.

Bottom line is that Neptune Wellness just lost $14M in net earnings but only has $13M cash on hand.  Something needs to happen but, I am not certain it will be pleasant.

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Neptune Wellness Stock Forecast

Neptune Wellness NEPT Stock Forecast

I kept these numbers fairly conservative for Neptune Wellness simply because I am not certain on growth rates of baby food.  However, I do believe that Neptune Wellness could partner up with a major US MSO to distribute its products here in the States.  That could really accelerate margins and push for profitability quickly.

Is Neptune Wellness NEPT Stock A Good Investment?

Neptune Wellness NEPT Stock Chart
Neptune Wellness NEPT Stock Chart

I wonder on the issue of cash on hand whether there will be a need to raise cash via debt or stock raise.  This is the one variable that I see as a challenge for Neptune Wellness right now.  They are not an exclusive cannabis producer, and so this means there will be lower growth rates after this surge in revenue from pushing distribution around the country.

Would I acquire Neptune Wellness?  No.  That is not to say the stock will not go upwards as much as it is that I am looking for pure-play cannabis companies.  Still, the upside potential is significant and, I believe there is a good chance that Neptune Wellness will do well.  But, I’m focused elsewhere.

Neptune Wellness NEPT Stock Financial Data

Neptune Wellness NEPT Stock Financial Statements

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