Neptune Wellness Solutions Inc Shares on Deep Discount in Transformational Year

NEPT Stock Swoons (As Expected)

In the lead-up to reporting its first-quarter results in mid-August, Neptune Wellness Solutions Inc (NASDAQ:NEPT) was one of the best-performing cannabis stocks of the year. On July 22, the company hit a new 52-week high of $6.57 for a then-year-to-date gain of 160%.

Come August, and the broader industry and market in general experienced a sell-off. Neptune Wellness, which shrugged off previous volatility, finally gave up some ground. Currently trading near $4.14 per share, the company’s share price is down 37% since hitting its July high, has fallen 27% since the start of August, and has lost 11% of its value since reporting its first-quarter results on August 14. On the plus side, NEPT stock is still up approximately 65% year-to-date.

Why has Neptune stock fallen so much over the last month if fiscal 2019 was supposed to be a “transformational year” in the company’s history?

Neptune Wellness has a strong balance sheet, having recently closed on a $41.0-million private placement, significantly expanded its extraction capabilities, and signed multi-year extraction agreements with cannabis heavyweights.

Unfortunately, investors were underwhelmed with the company’s financial results for the first quarter of fiscal 2019. Which really, were pretty much what the company warned was coming.

An Even Stronger Cannabis Stock

In its fourth quarter results, the company said that, “fiscal 2019 was a pivotal year for Neptune” and that it was, “in the enviable position of having more contracted demand in hand than our approved capacity can satisfy.” (Source: “Neptune Announces Fourth Quarter Results,” Neptune Wellness Solutions Inc, June 12, 2019.)

Because of this constraint, the company said it expected its cannabis extraction revenue for the first quarter to get hit. But those pains would be short-term; Neptune has been ramping up its extraction operations.

Back in July, we warned that Neptune Wellness stock would experience volatility after announcing its first-quarter results. Again, this was not because it was warranted—we already knew revenue would be lower—but because investors tend to have knee-jerk reactions. And they did, sending shares considerably lower.

But the fact remains that NEPT stock was a great cannabis stock before it announced its first-quarter results and continues to be an excellent pot stock overall. In fact, it’s an even stronger cannabis stock, as detailed below.

NEPT Stock Overview

Neptune Wellness Solutions Inc operates the largest cannabis extraction facility in Canada. It also recently expanded its extraction capabilities in the U.S. with the acquisition of its SugarLeaf plant in North Carolina. (Source: “Corporate Presentation,” Neptune Wellness Solutions Inc, last accessed August 22, 2019.)

In July, Neptune closed on the previously announced acquisition of North Carolina-based SugarLeaf Labs. SugarLeaf is a hemp processing company that provides extraction services and finished products. The company’s 24,000-square-foot facility is projected to reach an annual run rate of 3.3 million pounds (1.5 million kg) by the end of the calendar year 2019. There are also opportunities for the company to further expand this capacity.

Together, Neptune’s North American facilities will have an extraction capacity of 6.6 million pounds (3.0 million kg).

(Source: “NEPT Key Statistics,” Yahoo! Finance, last accessed August 23, 2019.)

Again, Neptune stock was on a tear over the first seven months of the year. NEPT stock was even able to avoid the sell-off that has smoked (pun not intended) the cannabis industry since May.

But not even strong financials and a great outlook could keep the company’s share price from tumbling, along with much of the rest of the market, in August. Results that didn’t live up to investor expectations sent the company’s share price even lower.

That said, despite the sell-off, NEPT stock, which is currently trading hands at $4.13 per share, is nearing a tested support level at $4.00. The next support level after that is at $3.00.

Because of the company’s strong outlook for the rest of the 2019 and 2020, the recent sell-off has put Neptune Wellness Solutions Inc in a much more attractive range.

Chart courtesy of StockCharts.com

Neptne Reports Q1 2020 Results, Poised For Significant Growth

Neptune’s first-quarter revenue slipped 15% year-over-year to CA$4.4 million. The decline in revenue was impacted by the timing of certain contracts in the Nutraceutical segment and constrained operations and extraction capacity in commercial production. (Source: “Neptune Reports Fiscal 2020 First Quarter Results,” Neptune Wellness Solutions Inc, August 14, 2019.)

Neptune reported a first quarter net loss of $6.5 million, compared to a loss of $4.1 million in the same period last year. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) came in at a loss of $3.6 million, compared with a loss of $2.3 million last year. The increase in Adjusted EBITDA was a result of investments made to support the company’s growing cannabis operations.

CEO Michael Cammarata said that he expects to see the positive impact from recently implemented initiatives to address operational and capacity constraints in the second quarter.

Meanwhile, multi-year contracts with Tilray Inc (NASDAQ:TLRY) and Green Organic Dutchman Holdings Ltd (OTCMKTS:TGODF) will provide Neptune with strong and consistent revenue over the next three years.

To help facilitate further growth, Neptune also announced the launch of Neptune Ventures, “an investment arm and technology incubator.” Neptune Ventures will also help juice Neptune’s growth with investments in Forest Remedies, the consumer brand of SugarLeaf, which includes hemp-derived cannabidiol (CBD) products.

Outlook

Neptune Wellness Solutions Inc expects extraction capacity constraints to be resolved this September, increasing capacity to 440,924 pounds (200,000 kg) of biomass annually from 66,138 pounds (30,000 kg).

In the U.S., capacity at the company’s SugarLeaf facility will reach 3.3 million pounds by the end of 2019. The SugarLeaf acquisition is expected to start contributing to Neptune’s revenue growth in the second quarter of fiscal 2020 (ended September 30).

Neptune’s Nutraceutical division is seeing increased demand for its CBD sourcing and formulas, which should help fuel revenue in the second half of fiscal 2020 (ended June 30, 2020).

Analyst Take

Neptune Wellness Solutions Inc is an excellent cannabis stock that has seen its share price tumble, victim of the broader cannabis industry sell-off and being unjustly kicked to the curb after announcing first-quarter 2020 results.

Neptune Wellness has inked a number of multi-year extraction agreements with some of the biggest names in the cannabis industry. To meet that demand, it has significantly increased its extraction capacity, providing the company’s two extraction facilities with impressive earnings potential. Which investors should start to see in the second quarter, which ends September 30.

Even though Neptune is still in the process of integrating its SugarLeaf acquisition, the company believes that “based on a conservative capacity utilization scenario of 50%, [its] two facilities could support in excess of $450 million in annual revenues.” (Source: Ibid.)

That’s pretty significant for a company that reported $24.4 million in revenue in fiscal 2019 and a market cap of just $395.0 million.

And all of the action should start in the next quarter.