Headquartered in Moncton, Canada, Organigram Holdings Inc. (OGI - Get Rating) is a producer and seller of cannabis and cannabis-derived products, operating under the Edison Reserve, Edison Cannabis Co., ANKR Organics, and Trailblazer brands. Over the past month, OGI’s share price has declined 34.8% on investor concerns about its lower-than-expected second quarter revenue and earnings.

While the company believes that its recent acquisition of The Edibles and Infusions Corporation could help boost its revenue, its business is still far from being profitable. The stock is currently trading 63.7% below its 52-week high of $6.45. 

Despite gaining 63.5% over the past year, OGI’s dismal performance in its last reported quarter and low profit margin could cause its shares to retreat further in the coming months.

Here is what we think could influence OGI’s performance in the near term:

Industry Headwinds

The resurgence of COVID-19 cases in Canada have  again taken a toll on marijuana stores. With a significant spike in new cases and the implementation of fresh lockdown measures, retail store closures could undermine sales by cannabis operators. Despite  bullish sentiment toward the cannabis industry amid increasing legalization in the United States, as COVID-19 concerns resurface investors’ enthusiasm about the industry’s potential could diminish.

Furthermore,  now that Mexico has  passed a bill last  to legalize recreational pot use—making it one of the world’s largest cannabis markets—the business climate for Canadian pot operators could grow even more competitive. Amid such an environment, pot stocks like OGI that are still struggling with their financials and profitability, may find it hard to recover.

Disappointing Financials and Profitability

OGI’s gross revenue declined 29% year-over-year to CAD$19.29 million in the fiscal second quarter, ended February 28, 2021. It  generated CAD$14.64 million in net revenue, representing a 37% year-over-year decline. This was mainly due to significantly lower wholesale revenue and a lower average selling price. It reported an adjusted EBITDA of negative CAD$8.64 million. The company’s gross margin declined 252% from the prior-year quarter to CAD$17.2 million. In fact, OGI’s net loss came in at CAD$66.39 million, compared to CAD$6.83 million in the second quarter of 2020.

OGI’s trailing-12-month cash from operations was negative CAD$13.75 million. Also, the company’s ROE, ROA and ROTC margins are negative, and its trailing-12-month gross profit margin and levered free cash flow margin stood at negative 147.5% and 12.7%, respectively.

Stretched Valuation

In terms of forward EV/Sales, OGI is currently trading at 13.28x, 100.4% higher than the industry average 6.63x. The stock’s forward Price/Sales multiple of 13.39 is 89.9% higher than the industry average 7.05x.

POWR Ratings Reflect Bleak Outlook

OGI has an overall rating of F, 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. OGI has a Quality Grade of D, given the stock’s weak profitability.

In terms of Sentiment Grade, OGI has an F because only two of the eight Wall Street analysts have rated the stock a ‘Buy.’

Also, it has a C grade for Momentum, which is consistent with the stock’s negative price returns over the past month.

Click here to view the additional POWR Ratings for OGI (Stability, Growth, and Value).

Of the 232 stocks in the F-rated Medical – Pharmaceuticals industry, OGI is ranked #232.

There are 28 top-rated stocks in the same industry. Click here to view them.

Bottom Line

Given the competitive and challenging cannabis landscape, OGI’s lower profitability and declining sales might impede its growth in the near term. Even its latest acquisitions are insufficient  to propel its growth going forward. Since the stock is showing no signs of a turnaround, we think it’s best to avoid it now.

OGI shares were trading at $2.45 per share on Wednesday morning, up $0.11 (+4.70%). Year-to-date, OGI has gained 84.21%, versus a 11.07% 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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