Is 22nd Century Group a Buy Under $5?

A leading plant-based biotechnology company, 22nd Century Group, Inc. (XXII) develops extremely low nicotine content tobacco products under the Moonlight and Moonlight Menthol brands, using proprietary genetic engineering technology. Its shares have risen 104.6% year-to-date on investors’ optimism about  the company’s advancement in the global commercial markets for tobacco and hemp/cannabis.

However, XXII’s stock price has tumbled 19.9% over the past month. In fact, the stock closed yesterday’s trading session at $4.50, 25.9% below its $6.07 52-week high.

The company has  yet to receive the FDA’s approval for its Modified Risk Tobacco Product VLN. And, because favorable federal legislative prospects for cannabis have increased competition in the cannabis space, XXII’s weak financials and high valuation could be a drawback for the stock.

So, here is what we think could influence XXII’s performance in the near term:

Uncertain Growth Prospects

Although XXII is prepared for a commercial launch of its VLN King and VLN Menthol King products, it is still awaiting a Modified Risk Tobacco Product (MRTP) authorization from the FDA. Until the company receives that approval, its revenue generating prospects will be limited. Furthermore, the competition in the cannabis market continues to be high amid growing demand for cannabis products and  a favorable federal legislative environment. These factors could be a threat to XXII’s future growth prospects.

Bleak Financials

XXII’s net sales revenue for the first quarter, ended March 31, 2021, was $6.8 million. This compares to $7.1 million in sales revenue for the first quarter of 2020. Its total operating expenses rose by $1.4 million compared to the prior-year period, primarily because of an increase in sales, general and administrative expenses. Also, the company reported a $5.2 million loss from operations and a $5 million  net loss for this period. Its loss per share came in at $0.03 and its adjusted EBITDA came in at a negative $4.4 million.

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The company’s 6.5% trailing-12-month gross profit margin  is 81.9% lower than the 35.65 industry average. Also,  its trailing-12-month ROE, ROA and ROTC are negative 37.4%, 34.7% and 21.9%, respectively. And its  trailing-12-month asset turnover ratio of 0.5% is 46.4% lower than the 0.8% industry average.

Sky-High Valuation

In terms of forward EV/Sales, XXII is currently trading at 22.60x, which is 933.3% higher than the 2.19x industry average. Its 23.66 forward Price/Sales multiple is significantly higher than the 1.77 industry average of 1.77. Also, XXII’s 13.07x trailing-12-month Price/Book ratio is 234.1% higher than the 3.91x industry average.

Consensus Price Target Indicates Potential Downside

Currently trading at $4.50, Wall Street analysts expect XXII to hit $4 in the near term, indicating a potential 11.1% downside.

Unfavorable POWR Ratings

XXII has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. XXII has a D grade for Growth, and an F for Quality. The stock’s weak growth prospects and low profitability are reflected in these grades.

Also, it has an F grade for Value, which is consistent with the stock’s premium valuation.

Beyond the grades we’ve highlighted, one can check out additional XXII ratings for Sentiment, Stability and Momentum here.

XXII is ranked #475 of 491 stocks in the F-rated Biotech industry.

There are several top-rated stocks in the same industry. Click here to view them.

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Bottom Line

Even though investors are hopeful that FDA’s commitment to reduce nicotine levels in cigarettes should bode well for XXII’s VLN product, its commercialization remains questionable in the absence of FDA approval. Furthermore, its lackluster financials and premium valuation make it a risky investment. So, we believe it’s wise to avoid the stock now.

Click here to checkout our Healthcare Sector Report for 2021

XXII shares were trading at $4.69 per share on Tuesday morning, up $0.19 (+4.22%). Year-to-date, XXII has gained 113.18%, versus a 12.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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