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Wednesday, May 11, 2016

22nd Century Beats On Revenues; Shares Attractively Valued

On May 10, 2016, 22nd Century Group, Inc. (XXII) reported financial results for the first quarter ending March 31, 2016. Revenues for the quarter totaled $3.02 million, up 390% over the first quarter 2015. Revenues exceeded the only published estimated of $2.55 million by Chardan Capital (link), as well as my estimate of $2.75 million. Net loss for the quarter totaled $3.25 million, or $0.04 per share. 22nd Century exited March 2016 with approximately $6.05 million in cash and investments. Operating burn during the first quarter totaled $2.8 million. As such, I believe the company has cash to support operations into October 2016.

For the full year 2016, I model revenues at $12.6 million, similar to the last published estimate by Chardan Capital of $12.3 million. For 2017, I model sales accelerating to $19.0 million, driven by the approval of BRAND-A in the U.S. expected later this year. Revenues are also being driven by sales of RED SUN® in the U.S. and MAGIC® outside the U.S.

I believe 22nd Century Group is attractively valued at today's price of only $0.77 per share. Based on 76.0 million basic shares outstanding, the current market value of the company is only $59.3 million. The enterprise value is $53.7 million. I believe this vastly undervalues the company.

As investors can see from the table below, "Big Tobacco" names such as British American Tobacco (BTI), Altria Group (MO), and Reynolds American (RAI) trade in a pretty tight range based on enterprise value to projected sales (EV / Sales). The group average is 6.6x based on estimated 2016 revenues for each player (data from Thomson/First Call). 


Based on my estimate of total revenues in 2016, 22nd Century Group is trading with an EV of only 4.3x sales. For the company to trade in-line with its larger peers, the stock would have to be at $1.17 per share. This equates to 50% upside simply to achieve peer valuation. In actuality, I believe 22nd Century Group should be trading a premium to "Big Tobacco" names using an EV / Sales metric because the company is growing at a substantially fast rate.

As investors can see from the table above, BTI, MO, and RAI are expected to post revenue growth in 2017 of 4%, 2%, and 5%, respectively. For 2017, I estimated 22nd Century Group will see revenue growth of over 50%, driven by the approval of BRAND-A, the world's first modified risk cigarette, later this year, as well as continue growth of both RED SUN® and MAGIC®.

I believe 22nd Century Group should trade with an enterprise value (EV) at 10x projected sales, similar to the valuation of a rapidly growing biopharmaceutical company. Based on my 2016 estimate, this equates to $1.73 per share, representing 121% upside from the current level. Based on 2017 projections, this equates to $2.60 per share; and I believe my projections are largely conservative given the recent exciting news about the use of Celanese's (CE) revolutionary new cigarette filter, CelFX®, designed to reduce toxicants in inhaled smoke. 

I see RED SUN® eventually achieving sales of $150 million in the U.S. and believe that BRAND-A and sub-licensing opportunities could be even larger, potentially in the billions, if I'm right that agencies such as the FDA, Health Canada, the EC-TPD, and MHNZ are headed in the direction of mandating a reduction in nicotine levels in cigarettes to curb tobacco addiction and reduce smoking rates across the globe. 22nd Century Group's technology looks to be at the center of this directive.

More On XXII

Read about the use of Celanese's new CelFX® filter in MAGIC® >> HERE
Read my interview with XXII CEO, Henry Sicignano III >> HERE
Read about BRAND-A and XXII's "modified risk cigarette" >> HERE

I will post the transcript of the Q1-2016 conference call >> HERE (not yet available) 


Jason Napodano of BioNap, Inc. is long shares of XXII
Please see the BioNap Disclaimer

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