Kaival Brands Innovations Group, Inc. (KAVL) in Grant, Fla., distributes electronic nicotine delivery systems (ENDS Products) and related components in the United States. The company is the exclusive global distributor of all products manufactured by Bidi Vapor, which is owned and controlled by the same principal.

KAVL shares have declined 92.4% in price over the past year and 62.4% over the past six months. Investors were anxious about the impact of the FDA’s Premarket Tobacco Product Application (PMTA) process. In 2019, a Maryland federal court judge gave FDA a deadline of one year to review all submitted PMTAs. And in 2021, it issued marketing denial orders (MDO) for virtually all PMTAs for flavored vaping products. Later, the manufacturer of the premium BIDI® Stick ENDS requested that the FDA reconsider its MDO based on scientific evidence while also seeking a judicial stay of the MDO with the 11th Circuit Court of Appeals. And last month, the company announced that it had been granted a judicial stay of the marketing denial order as a legal fight for the review of Bidi Vapor’s PMTA continues.

The judicial stay propelled the stock’s price higher, helping the company to regain compliance with the minimum bid price requirement under Nasdaq’s Listing Rule. KAVL’s shares have gained 176.5% year-to-date to close the last trading session at $2.06. If the company had failed to regain compliance, it would have been subjected to delisting.

Here is what could shape KAVL’s performance in the near term:

Financial Results Impacted by the FDA’s Regulations

For its fiscal year ended October 31, 2021, KAVL’s revenues came in at $58.78 million, representing an 8.6% decline year-over-year. The decline was primarily due to the FDA’s issuance of Bidi Vapor’s MDO, which restricted the company from marketing its  non-tobacco flavored BIDI® Sticks in the United States, along with increased competition. The company reported a  $9.03 million net loss , versus  $3.85 million in net income in the prior year. The decrease can be attributed to its decline in revenues and the increase in operating expenses. Also, its net loss per share came in at $0.38, versus its $0.09 per share year-ago net income.

Bleak Profit Margins

KAVL’s 20.30% gross profit margin is 43.4% lower than the 35.89% industry average. Also, its EBIT  and net income margins of negative 17.81% and 15.37%, respectively, are  substantially lower than the 9.51% and 6.69% industry averages.

Furthermore, KAVL’s ROE, ROA, and ROTC of negative 87.13%, 29.92%, and 62.70% compare with the 17.25%, 6.11%, and 7.91% respective industry averages.

POWR Ratings Reflect This Bleak Prospects

KAVL has an overall F rating, translating to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an F grade for Stability, which is consistent with its 2.57  beta.

KAVL has a D grade for Quality, in sync with its negative profit margins.

Among the 12 stocks in the Tobacco industry, KAVL is ranked the last.

Beyond what I have stated above, one  can also view KAVL’s grades for Sentiment, Growth, Momentum, and Value here.

View the top-rated stocks in the Tobacco industry here.

Bottom Line

The company is actively exploring and negotiating potential international distribution opportunities for its offerings to expand into global markets. However, considering the regulatory headwinds, it might take a while for KAVL to improve its margins and return to profitability. Thus, I think it could be wise to avoid the stock.

How Does Kaival Brands Innovations Group, Inc. (KAVL) Stack Up Against its Peers?

While KAVL has an overall POWR Rating of F, one might want to consider investing in the following Tobacco stocks with a B (Buy) rating: Japan Tobacco Inc. (JAPAY), Altria Group, Inc. (MO), and Vector Group Ltd. (VGR).

KAVL shares fell $0.04 (-1.94%) in premarket trading Friday. Year-to-date, KAVL has gained 176.40%, versus a -10.42% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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