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Hydrofarm Contends With Industry Downturn But May Become Acquisitive

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A Quick Take On Hydrofarm Holdings

Hydrofarm Holdings (NASDAQ:HYFM) went nationalist successful December 2020, raising astir $173 cardinal successful gross proceeds successful an IPO that was priced astatine $20.00 per share.

The patient manufactures and distributes a range of hydroponic instrumentality and supplies.

Until manufacture conditions statesman to constituent to a rosier outlook and nan patient reignites gross growth, I’m connected Hold for HYFM stock.

Hydrofarm Overview

Petaluma, California-based Hydrofarm was founded to design, manufacture, and administer controlled situation agriculture products, besides known arsenic vertical farming, chiefly successful nan United States and Canada.

Management is headed by Chairman and CEO, Bill Toler, who has been pinch nan patient since 2019 and was antecedently CEO of Hostess Brands (TWNK) and has much than 35 years acquisition successful nan proviso concatenation guidance and CPG business.

The company’s superior offerings include:

  • Lighting

  • Equipment

  • Grow Media

  • Nutrients

  • Supplies

The schematic beneath shows examples of nan supra categories:

Company Products

Company Products (SEC)

Hydrofarm’s Market & Competition

According to a 2018 marketplace research report by Grand View Research, nan world marketplace for vertical farming was an estimated $2.5 cardinal successful 2018 and is expected to scope $9.7 cardinal by 2025.

This represents a forecast very beardown CAGR of 21.3% from 2019 to 2025.

The main drivers for this expected maturation are a increasing take by consumers of fruits and vegetables that are produced successful an environmentally-friendly mode arsenic good arsenic nan beardown maturation of organization successful ample municipality centers.

Also, indoor farming tin nutrient crops passim nan year, protecting crops from utmost weather.

Below is simply a floor plan showing nan humanities and projected early maturation complaint of various aspects of nan vertical farming marketplace successful Canada:

Canada Vertical Farming Market

Canada Vertical Farming Market (Grand View Research)

Major competitory aliases different manufacture participants include:

  • Scotts Miracle-Gro (SMG)

  • National wholesale distributors

  • Small location competitors

Hydrofarm’s Recent Financial Performance

  • Total gross by 4th has fallen successful caller quarters:

Total Revenue

Total Revenue (Seeking Alpha)

  • Gross profit separator by 4th has dropped considerably recently:

Gross Profit Margin

Gross Profit Margin (Seeking Alpha)

  • Selling, G&A expenses arsenic a percent of full gross by 4th person accrued markedly successful caller quarters:

Selling, G&A % Of Revenue

Selling, G&A % Of Revenue (Seeking Alpha)

  • Operating losses by 4th person worsened recently:

Operating Income

Operating Income (Seeking Alpha)

  • Earnings per stock (Diluted) person besides produced sharply antagonistic results recently:

Earnings Per Share

Earnings Per Share (Seeking Alpha)

(All information successful nan supra charts is GAAP)

In nan past 12 months, HYFM’s banal value has fallen 87% vs. that of nan Nasdaq 100 Index's driblet of 6.6%, arsenic nan floor plan indicates below:

52-Week Stock Price Comparison

52-Week Stock Price Comparison (Seeking Alpha)

In its past net telephone (Source - Seeking Alpha), covering Q3 2022’s results, guidance highlighted nett income arsenic being wrong erstwhile expectations while free rate travel exceeded its soul estimates.

Leadership noted nan continuing situation facing its unit transmission income but nan improving results for commercialized income successful various U.S. states.

Commercial income roseate from 19% of its income done Q3 2021 to 31% of its income successful nan first 3 quarters of 2022.

As to its financial results, full gross dropped 40% year-over-year, while gross profit separator fell 16 percent points.

SG&A expenses arsenic a percent of gross continued higher, a worrying inclination that guidance will request to much afloat address.

Operating losses worsened, further pressuring nan banal successful a rising costs of superior situation that punishes money-losing companies.

For nan equilibrium sheet, nan patient vanished nan 4th pinch $16.5 cardinal successful rate and equivalents and $118.8 cardinal successful full debt.

Over nan trailing 12 months, free rate utilized was $21.5 million, of which superior expenditures accounted for a hefty $9.4 million. The institution paid a important $8.3 cardinal successful stock-based compensation successful nan past 4 quarters.

Valuation And Other Metrics For Hydrofarm

Below is simply a array of applicable capitalization and valuation figures for nan company:

Measure [TTM]

Amount

Enterprise Value / Sales

0.6

Enterprise Value / EBITDA

NM

Price / Sales

0.2

Revenue Growth Rate

-13.8%

Net Income Margin

-66.4%

GAAP EBITDA %

-5.6%

Market Capitalization

$74,530,000

Enterprise Value

$229,670,000

Operating Cash Flow

-$12,070,000

Earnings Per Share (Fully Diluted)

-$5.82

(Source - Seeking Alpha)

Future Prospects For Hydrofarm

Looking ahead, guidance expects nan cannabis manufacture to stabilize and return to growth; however, nan timing of that activity is simply a awesome question.

Legislation activity successful nan U.S. continues to supply a larger addressable market, particularly for nan firm’s commercialized attraction connected growers successful much recently-legalized jurisdictions.

Management said that nan post-pandemic supply-demand imbalance is becoming little pronounced arsenic clip passes.

Consumable merchandise income person reduced nan company's gross diminution to a greater grade than competitors, according to management.

Regarding valuation, nan marketplace has punished nan stock’s EV/Revenue aggregate to life lows complete nan past 12 months, arsenic nan floor plan shows below:

EV/Sales Multiple History

EV/Sales Multiple History (Seeking Alpha)

The superior consequence to nan company’s outlook is nan likelihood of a macroeconomic recession aliases downturn, reducing discretionary request for cannabis products, thereby pressuring growers who are nan firm’s customers.

Notably, activity believes that nan firm’s ‘strong financial position’ will springiness it a limb up successful what it appears to position arsenic imaginable for consolidation done M&A deals.

However, HYFM has generated affirmative rate travel successful only nan past 2 quarters and guidance besides revenge a support offering for ‘flexibility’ purposes, though it said it has nary existent plans to raise indebtedness aliases equity.

I expect guidance will beryllium tempted to get marketplace stock during this cannabis recession done acquisitions and that it will request to raise further superior to do so.

The mobility is whether it will beryllium done shareholder-diluting equity aliases liking expense-increasing debt.

Regardless, until manufacture conditions statesman to constituent to a rosier outlook and nan patient reignites integrated gross growth, I’m connected Hold for HYFM stock.

Editor's Note: This article covers 1 aliases much microcap stocks. Please beryllium alert of nan risks associated pinch these stocks.

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Editor: Naga



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