Organigram has Robust Production, Distribution, and Brands – But should you invest?

Moncton, New Brunswick-based Organigram Holdings Inc. (TSXV: OGI) (NASDAQ: OGI), a leading licensed producer of cannabis, announced its first cannabis shipments to Quebec, making its products available in all 10 provinces across Canada.

Investors were moderately pleased and the stock rose 3% on early trading.

Over the past month, Organigram’s stock has fallen 20% and it is now more attractively priced. The decline does not coincide with any company blunders—it continues to position itself for long-term success. Instead it appears to be caught in the general downdraft of the cannabis industry, as investors let inflated cannabis stock prices fall across the industry.

With the price down this far, is this an opportunity to buy?

In our view, the answer is yes.

Let’s be clear: all cannabis investments are risky due to the newness of the market and its eventual shakeout in the coming two years. Investors need to know this.

But for those who understand this, Organigram appears to be one of the better buys in the industry. It has one of the highest yields per sf in the industry at 230 grams per sf, twice the industry average. This should eventually give it a low cost of production, when its production fully matures in late 2019 and 2020. At that time, they will be able to produce about 115k kgs per year of cannabis.

While this is well below what Aurora Cannabis (700k kgs) and Canopy Growth (550k kgs) will eventually produce, it will make Organigram one of the larger producers.

It should be noted, it does not appear Organigram has yet achieved the expected low cost of production, as their current gross margin is only about 30%—pretty low. This needs to improve, but we expect it to.

Based on its most recent quarterly revenue (x4), it is currently generating revenue at an annualized rate of US$80 million per year. Its forward Price to Sales ratio is 11, only twice the average of the mature tobacco industry, which is reasonable in the cannabis industry.

At its current stock price of US$6.40, we estimate it is priced for revenue of about $190 million. Like all cannabis stocks, it is still overpriced for its current revenue (and lack of profit), and its stock could certainly go down before it goes up if industry news turns bad. But we don’t expect it to stay down.

When it is producing 115k kgs of cannabis, it should be able to generate up to US$500 million in revenue, if it sells all the cannabis. We think selling even half of this—generating about $250 million—would drive its stock price higher on a solid, long term, stable basis.

Not all cannabis companies will be able to sell all their production in the coming two years, as new production comes online and the market starts to shake out as it turns from being under supplied to being over supplied. (Just look at Oregon where too many growers are driving some out of business.)

But Organigram looks well situated to survive the shakeout, with low cost production, supply agreements with all 10 provinces, strong brands, and international partnerships in place.

All cannabis investing is risky. Most companies are not yet generating any profit, let alone a reliable profit. But if an investor knows the risks, Organigram could be a winner for the reasons discussed.

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