KushCo Holdings Inc: This $5.60 Stock Is a Top Marijuana Value Play

KushCo Holdings Inc: This $5.60 Stock Is a Top Marijuana Value Play
iStock.com/Tinnakorn Jorruang

A Pot Stock Most People Have Never Heard Of

If you consider cannabis to be the new gold rush, then this company is selling the picks and shovels. I’m talking about KushCo Holdings Inc (OTCMKTS:KSHB), the parent company of a strategically integrated group of business units.

Among the subsidiaries is Kush Supply Co., which is one of the biggest distributors of packaging, supplies, and accessories for the U.S. marijuana industry.

Admittedly, providing packaging and supplies doesn’t seem as exciting as producing tens of thousands of kilograms of marijuana. But for companies that want to sell their cannabis products to consumers, KushCo’s offerings are extremely important.

You see, the government doesn’t allow companies to market their cannabis products to consumers through TV commercials or Google ads. Therefore, packaging is actually a main form of marketing. And because shelf space is limited, each cannabis company needs to differentiate itself from competitors through packaging.

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Moreover, the marijuana industry has more than one type of product. It sells flower, pre-rolls, concentrates, and much more.

Each of these products requires a different type of packaging. KushCo has the expertise to package a variety of items. The company currently offers more than 1,500 stock-keeping units (SKUs) of packaging products. (Source: “KushCo Holdings,” KushCo Holdings Inc, last accessed March 11, 2019.)

Other than providing packaging products for the cannabis industry, KushCo also sells vape cartridges, batteries, all-in-one disposables, and pen kits. It is also one of only four exclusive CCELL (a ceramic cell patented technology) distributors in the United States.

Vaping is a fast-growing segment in the marijuana boom, and product performance is key to ensuring a satisfied customer experience. By being a reputable distributor of high-quality vape kits, KushCo is well positioned to benefit from the growth in this segment.

As I mentioned earlier, KushCo is the parent company to a whole bunch of businesses. Another one of its subsidiaries is Kush Energy, which supplies solvents to the cannabis sector.

To be more specific, Kush Energy provides the butane, hydrogen, ethanol, and dry ice used in the extraction process of making cannabis oil. Because these are hazardous materials, it’s important for companies to find a reliable source. And Kush Energy provides exactly that.

Therefore, while KushCo Holdings Inc is not growing any cannabis, it provides products and services that are critical for those who want to produce and sell cannabis products. That’s why I consider it a “picks-and-shovels” play in the marijuana gold rush.

KushCo Holdings Inc Runs a Fast-Growing Business

How does this picks-and-shovels play match up against the hottest marijuana companies in terms of growth?

Well, the most popular pot producers are known for delivering double-digit (and sometimes triple-digit) year-over-year sales increases. That’s why the sector is so hot.

And while KushCo is a lesser-known picks-and-shovels business, its revenue growth rates are equally impressive.

Consider that, in KushCo’s fiscal-year 2017, it generated $18.8 million in revenue. In fiscal-year 2018, the company’s revenue totaled $52.1 million, representing a 177% increase. (Source: “KushCo Holdings Reports Fiscal Year 2018 Results,” KushCo Holdings Inc, November 26, 2018.)

The momentum has continued to the current fiscal year. In the first quarter of KushCo’s fiscal-year 2019, which ended November 30, 2018, the company’s revenue grew another 186% year-over-year to $25.3 million. (Source: “KushCo Holdings Reports First Fiscal Quarter 2019 Results,” KushCo Holdings Inc, January 8, 2019.)

Strong Revenue Growth in All Five Product Categories

KushCo’s revenue growth has been across the board. The table below shows the year-over-year growth rates in each of the company’s five product categories in the first fiscal quarter of 2019.

Item Class 2019 Q1 Revenue Year-Over-Year Growth
Labels, Seals & Applications $401,268 159%
Packaging $5.1 Million 93%
Vape $15.3 Million 215%
Energy + Natural Products $2.3 Million 3,526%
Papers & Supplies $2.2 Million 95%
Total $25.3 Million 186%

(Source: “KushCo Holdings,” KushCo Holdings Inc, last accessed March 11, 2019.)

And that was just the start. For the full fiscal-year 2019, management expects KushCo to generate $120.0 million in revenue, which would mark another 130% increase from the $52.1 million it earned in fiscal-year 2018. (Source: Ibid.)

KushCo Holdings Inc Stock Chart

Usually, when a company is growing as fast as this, its stock would be highly sought-after. That’s why we have so many high-flying pot stocks in today’s market.

However, if you take a look at the following stock chart, you’ll see that, over the past 12 months, KSHB stock has been trading mostly sideways.

Chart courtesy of StockCharts.com

Because KSHB stock didn’t really shoot through the roof, it can still offer investors something we rarely see in the pot industry today—value.

You see, the hottest pot tickers often carry high double-digit, if not triple-digit, price-to-sales ratios.

Yet right now, KushCo Holdings has a market capitalization of around $488.0 million and an expected 2019 revenue of $120.0 million. That means the company is trading at just over four times its forward sales, a metric that’s much lower than nearly every ticker in the pot industry.

Analyst Take

Going forward, cannabis companies will likely continue to deliver impressive growth numbers. According to Cowen Inc (NASDAQ:COWN), the U.S. legal cannabis industry is projected to reach $75.0 billion by 2030. (Source: “Cannabis: $75B Opportunity; Category Cross-Currents Keep Us Cautious On Booze,” Cowen Inc, April 11, 2018.)

As the industry further expands, it will undoubtedly create more opportunities for picks-and-shovels plays like KushCo.

And because the stock remains undiscovered by many market participants (it trades over the counter, after all), it offers a much cheaper valuation compared to most other pot stocks. This means, once more investors realize the company’s potential, KSHB stock could get a lot more expensive.