Neptune Wellness Solutions Inc Bucks Trend as Other Pot Stocks Get Smoked

Neptune Wellness Solutions Inc Bullish as Other Cannabis Stocks Get Smoked
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2019 a Breakout Year For Neptune Wellness Solutions Inc

For the most part, cannabis stocks are getting smoked. That has nothing to do with their long-term growth potential, but it shows that the legal marijuana industry is still in its infancy and is experiencing growing pains. One cannabis stock that has been bucking the trend though is Neptune Wellness Solutions Inc (NASDAQ:NEPT).

Neptune Wellness stock is up approximately 80% year-to-date. It avoided the May sell-off that hammered the broader markets and it continues to trend slowly but steadily higher.

Cannabis stocks are being dragged down on word that Health Canada pulled CannTrust Holdings Inc’s (NYSE:CTST) pot products from shelves in Ontario after it discovered that the company had grown cannabis in greenhouse rooms before receiving the appropriate licenses.

Yes, it has nothing to do with other cannabis producers, but investors tend to have a swarm behavior, and correlation is causation for an entire industry.

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That downward spiral did not hit NEPT stock though. Why is it gaining while the broader industry is in the red?

Neptune Wellness has a strong balance sheet, it received a license to produce cannabis from Health Canada, it has expanded its offerings into the U.S., it recently signed multi-year cannabis extraction agreements with Tilray Inc (NASDAQ:TLRY) and Green Organic Dutchman Holdings Ltd. (OTCMKTS:TGODF, TSE:TGOD), and it announced that it is expanding its extraction capacity.

Neptune Wellness Solutions Inc Overview

From krill to cannabis, Neptune Wellness Solutions has evolved into a burgeoning company engaged in the extraction, purification, and formulation of health and wellness products. (Source: “Mission and Vision,” Neptune Wellness Solutions Inc, last accessed July 10, 2019.)

The Laval, Quebec, Canada-based company operates in five key areas: cannabis, ingredients, turnkey solutions, pet supplements, and consumer brands.  The area that investors are most interested in is cannabis.

Neptune’s wholly-owned subsidiary 9354-7537 Québec Inc. specializes in processing cannabis for the production of cannabis oil and extracts. In fact, Neptune has the largest cannabis extraction facility in Canada.

In March, the company began shipping extracts from its facility in Sherbrooke, Quebec.

Annual production at the 50,000-square-foot facility is soon expected to reach 200,000 kilograms (440,924 pounds). The next expansion phase will increase the company’s total extraction capacity in Canada to a whopping 1.5 million pounds (3.3 million pounds). (Source: “Neptune Announces Fourth Quarter Results,” Neptune Wellness Solutions Inc, June 12, 2019.)

This is expected to help Neptune achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and operational cash flow in fiscal 2020, which started on April 1, 2019.

Through its turnkey solutions business, Neptune develops supplements for other companies, primarily as capsules, softgels, liquids, and powders.

NEPT Stock Information
Market Cap $377.8 Million
52-Week Change 43%
52-Week High $5.22
52-Week Low $2.42
Shares Outstanding: 79.3 Million
Float 60.2 Million
50-Day Moving Average: $4.36
200-Day Moving Average: $3.74

(Source: “Neptune Wellness Solutions Inc. (NEPT),” Yahoo! Finance, last accessed July 10, 2019.)

Neptune Wellness stock has been on a solid growth trajectory in 2019, fueled in large part by the company’s aforementioned license to process cannabis, new extraction agreements, and start of commercial production and shipping of cannabis extracts.
Chart courtesy of StockCharts.com

Neptune Establishes U.S. Footprint With Acquisition of SugarLeaf Labs

In May, Neptune Wellness announced that it had established a footprint in the U.S. with the acquisition of North Carolina-based hemp processor SugarLeaf Labs.

With the acquisition, Neptune gains a 24,000-square-foot facility with a processing facility that has a capacity of 1.5 million kilograms (3.3 million pounds) of hemp. The transaction is expected to be closed by the end of July. (Source: “Neptune Signs definitive agreement to acquire the assets of Hemp processor SugarLeaf Labs,” Neptune Wellness Solutions Inc, May 9, 2019.)

“With Neptune’s Canada-based operations ramping up production and the cannabis industry growing exponentially around the world due to an evolving legal global framework, now is the time to establish a state-of-the-art supply chain in the U.S. marketplace,” said Jim Hamilton, president and CEO.

Extraction Agreements With Tilray & Green Organic Dutchman

June was a busy month for Neptune. On June 7, the company announced that it had signed a three-year extraction agreement with Tilray to process 125,000 kilograms (275,578 pounds) of cannabis and hemp biomass. (Source: “Neptune signs multi-year extraction agreement with Tilray,” Neptune Wellness Solutions Inc, June 7, 2019.)

On June 12, the company announced that it had signed a multi-year agreement with Green Organic Dutchman to process more than 230,000 kilograms (507,000+ pounds) of cannabis and hemp biomass. (Source: “Neptune Signs Multi-Year Extraction Agreement for 230,000 kg Including Turnkey Solutions with The Green Organic Dutchman,” Neptune Wellness Solutions Inc, June 12, 2019.)

Fourth-Quarter Results

On June 12, Neptune announced that its fourth-quarter revenue, for the period ended March 31, 2019, decreased 18.6% year-over-year to $5.7 million. What’s important to understand is that Neptune recorded its first cannabis revenue during the last few weeks of that quarter. (Source: “Neptune Announces Fourth Quarter Results,” Neptune Wellness Solutions Inc, op. cit.)

The company’s fourth-quarter net loss increased to $12.4 million, compared to $4.8 million in the same prior-year period. Some $7.9 million of that was the result of litigation costs associated with a now-settled claim filed by the company’s former CEO.

“Fiscal 2019 was a pivotal year for Neptune, with our team’s efforts recently culminating in material contract announcements and a U.S.-based acquisition,” said Hamilton.

“Looking into this fiscal year and beyond, we are in the enviable position of having more contracted demand in hand than our approved capacity can satisfy.”

To that end, the company expects its cannabis extraction operations to be constrained by limited biomass inventory. As a result, Neptune expects that its cannabis extraction revenues for the first quarter will be less than $1.0 million.

The company believes that its revenue from extraction and packaging will increase “significantly” starting in the second quarter of fiscal 2020 (ending September 30).

Analyst Take

Neptune Wellness Solutions Inc is one of the few cannabis stocks that has weathered the recent downtrend affecting most of the marijuana industry.

And for good reason: this has been a monumental year for the company. That should turn Neptune into a profitable, cash-generating cannabis company. Note that “profitable” and cash-generating” are not terms familiar to most cannabis companies.

Neptune stock will experience growing pains, probably in the first quarter. Not because it is warranted (the company has already warned that first-quarter revenue will be less than enthralling), but because many investors do not read corporate outlooks.

Beyond that, look for Neptune to impress Wall Street.