Stock Price: $23.60
Market Cap: $710.7M
Average Target Price: $44.83
The number of analysts covering stock: 6
Investor Presentation [click here]
I added MWK stock to my portfolio on April 15th. The stock has been recently beaten up losing more than 50% since its highest point of $48.6; now trading at $23.60. Before it reached $48.60 it ran more than 2,700% from the lows of $1.7 in March of 2020.
The recent drop in price is due to several reasons:
Investors taking profits. You should realize some people/institutions were lucky to get it in the $2 to $5 range, so once the selloff started more and more people join it as they still sell the stock at some profit.
Q4 sales declined vs. Q3. However, they were still up 63% YOY.
The company recorded $36M in unexpected expenses in Q4 which widened loss and sent EPS into even more negative territory. This expense was in big part due to non-cash stock compensation. Investors are obviously not pleased with such stock compensation when the company is in big debt and might need to issue more shares in 2021 to raise capital.
The company said the following in their 2021 outlook, which is actually quite surprising (we will get to this later): The most directly comparable GAAP financial measure for Adjusted EBITDA is net loss and we expect to report a net loss for the twelve months ending December 31, 2021, due primarily to quarterly interest expense, net, fair value changes on contingent earnout liabilities from our acquisitions, fair value changes from warrant liabilities from our financings and stock-based compensation expense.
However, on a positive note for MWK stock:
Full-year 2020 net revenue grew 62.3% year over year to $185.7 million.
Mohawk Group Holdings provided an increased 2021 outlook: For full-year 2021, the Company now expects net revenue to be in the range of $350 million to $380 million, assuming the anticipated acquisition of Photo Paper Direct. If the company hits the $380 million predictions, this would mean a 100% increase in revenue.
For full-year 2021, on the same assumption (acquisition of Photo Paper Direct), the Company now expects Adjusted EBITDA to be in the range of $30.0 million to $34.0 million up from $28.0 million to $32.0 million. https://finance.yahoo.com/news/mohawk-group-reports-fourth-quarter-210500831.html
The stock is currently trading "at a 50% discount" vs. its all-time highs.
Let's go back to the company's outlook about reporting a loss for 2021. The company states that interest payments and other unexpected expenses will eat into EBIT so much that they will be left with a loss. Indeed, the company Mohawk issued senior secured promissory notes in an aggregate principal amount of $110.0 million. The new senior secured promissory notes have an 8% annual interest rate payable in cash on a quarterly basis with a three-year maturity. This gives an interest expense of $2.2 million per quarter not counting the principal repayment.
Below are past income statements for MWK with 2021 and 2022 projections based on outlook and analysts' predictions. As you may notice Mohawk has been improving Gross Profit Margin over the past years and currently reached a Gross Margin of ~45.6%. We will assume the company will maintain this Gross Margin. However, usually with growing revenues companies may increase Gross Margin which will work in our favor. Also, the company has been maintaining SG&A expenses quite well and managed to decrease them in the past 2 quarters. We will assume the company will increase SG&A expenses by 10% for the next 2 years.
As you can see below, using the predicted revenue levels and our assumptions from above the company should generate Operating Earnings (EBIT before Unusual Expenses) of $49 million for 2021 and $79 million for 2022.
If we use the current number of outstanding shares this would provide EBIT (before unusual expenses) per share of
$2.35 for 2021 and
$3.88 for 2022.
We have estimated interest payments at $8.8 million per year. So, it is puzzling how the management of the company believes it will spend $49.13 million on interest payments, fair value changes on contingent earnout liabilities from our acquisitions, fair value changes from warrant liabilities from our financings, and stock-based compensation expense. I cannot comment on the rest of the above unusual expenses, but am hoping they would be less than $40 million.
If they are able to maintain their unusual expense at the current level and the interest expense at the current levels we should see EPS of $0.20 for 2021 and $1.63 for 2022.
Analyst Predictions for MWK stock
Analysts are predicting fast growth in revenue but slower growth in Profit. Revenue and profit are expected to achieve $723 million $46 million respectively by the end of 2024.
With that level of growth MWK, analysts are expecting EPS to achieve$1.465 by the end of 2024.
On a positive note, Mohawk is expected to start generating positive Cash Flow as early as 2021 as most of the unusual expenses (in addition to depreciation) are related to adjustments not impacting actual cash flow for the company. So, the company will start generating positive cash flow even after paying off interest and principal for its debt.
As you know Cash Flow is more important for the company and the valuation of its stocks than EPS. For, example analysts are predicting cash flow to reach $2.7 million in 2021 and $27.8 million in 2022. Using the current number of shares (20.8 million) gives the price to cash flow ratio for MWK for 2022 of 18. The average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 14.05. So, we are still a bit overpriced, but I believe we will get there by 2023.
The positive cash flow makes analysts quite bullish on the stock. The average price target for MKW is $44.80 (among 6 analysts covering the company). All 6 analysts are giving the stock a Buy rating. The highest target price is $50 and the lowest is $40.
MWK stock Institutional Ownership
MWK stock has an interesting ownership structure as insiders hold about a quarter of the outstanding shares. Private companies own 27% of the stock. Institutions still have a small share.
The fact that the company is run by owner-operators is seen as a positive factor as it is more likely the owners will want to continue growing their wealth through growing share price. For now, however, they have been diluting the shares quite heavily. I hope this practice will stop as the company starts generating positive cash flow.
Institutions have been adding to their positions for MWK. Also, there are quite a few new institutions adding the company to their portfolios.
Disclaimer: As usual, trade at your own risk. I own MWK stock. I do not suggest you should buy any of the stocks I write about. As usual, please do your own due diligence before investing your own money in any of the stocks I write about. The above analysis is quite basic and just gives ideas for further research. A much deeper analysis is required for each stock, including the analysis of operations, debt, etc. I may sell any of the stocks I say I currently own at any moment before it reaches the targets that I set or keep them for even when they reach the target.