With the overall bearish sentiment dragging the cannabis sector down, OrganiGram (OGI) might be a “diamond in the rough” that’s just caught in a sector-wide selloff. Although the stock is currently trading not far off of its 52-week lows, we believe OGI is a solid cannabis company, caught in an unfavorable environment.
OGI is a cannabis producer based out of New Brunswick, Canada. They will produce at least 100,000 kilos of annual output, if they fully build out their cultivation assets.
The fact that they are located in eastern Canada is an advantage because of the cannabis-use rates. The amount of cannabis that adults in the eastern provinces consume is much higher than the Canadian average.
Although not as populated as the rest of Canada, the eastern provinces give OGI a solid consumer base. The company is also one of five licensed producers, with a license to sell in all 10 provinces.
OGI is the only decent sized cannabis producer in the province with one single location. The fact that OrganiGram has just one location makes it much easier and cost-effective for the company on many levels, especially logistics.
OGI has a very unique way of growing cannabis at their Moncton facility. The company uses a three-tier system that allows for about 3 times the cannabis being grown in the same space as their competitors. This ensures efficiency and cost savings when it comes to their capacity footprint.
Another thing we like about the company is the fact that they focus on high margin products. OGI invested $15 million Canadian dollars into a fully automated line that will enable the company to produce roughly 4 million kilograms of infused chocolates per year. The company also said they will be launching a powder that can be added to beverages in the first half of 2020.
We have seen that cannabis companies that increase their size too quickly, often have significant losses, rather than profits, and some even have weak balance sheets, like Aurora Cannabis (ACB). In September 2019, ACB reported a C$40 million EBITDA loss.
However, OGI has had measured growth and was even profitable in their last quarter’s earnings report. In January, they announced an operating profit of almost CA$1.2 million, and as a result the stock soared over 40%.
When it comes to the balance sheet, OGI is attractive. The company does not carry billions worth of goodwill, like Aurora Cannabis (ACB). Although they needed to use share offerings to raise capital, the company looks to be in solid financial shape compared to its peers.
The current environment for cannabis stocks is challenging, and it will continue to be a rocky road for some the largest companies. However, we believe OGI is well-positioned to weather the storm, with its lean size and strong market presence. If OGI can continue to deliver profitable quarters, the company should pull away from the pack.
OGI shares were trading at $1.75 per share on Wednesday afternoon, down $0.11 (-5.91%). Year-to-date, OGI has declined -28.57%, versus a -13.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
