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Green Organic Dutchman (TGODF): The Risk/Reward Is Attractive

support@smarteranalyst.com (Ben Mahaney)

Green Organic Dutchman (TGODF) is one of those cannabis stocks that it seems either investors love or hate. Even those who give some props to the company, it is usually presented in a way that the negative catalysts outweigh the positive catalysts.

Most of that comes from the lack of revenue as a result of the company building out facilities that, for the most part, have yet to become operational.

That is rapidly changing. The company estimates it should produce about 65,000 kilograms of cannabis a year by the end of 2019, and by the latter part of 2021, it guides for production capacity to soar to 219,000 kilograms a year. That would place it in the top 5 of Canadian producers as they stand today.

Of that total, about 20 percent will be used in edibles and infused beverages.

Negative catalysts

There are several key negative catalyst that have been expressed toward Green Organic, including lagging its competitors in implementing its strategy, uncertainty in regard to whether or not the beverages and edibles market will be as robust as expected, and the suggestion its plans may be too ambitious.

As far as falling behind the general market, I'm not as concerned here as I would be with most other cannabis producers. The major reason for that is it's competing in the specialized premium organic pot market. That market is in earlier stages than the general recreational and medical cannabis markets, so it isn't as important to garner share as quickly as companies that compete in multiple segments of the cannabis market. Demand from organic cannabis users will seek out quantity and quality, and Green Organic Dutchman, once it starts delivering product at significant levels, should be very attractive to that market.

Concerning beverages and edibles, that is a legitimate concern. That said, the Canadian market is different than the American market, which has struggled because of mixed signals from authorities concerning infused drinks and edibles. Canada is probably going to be a lot clearer in those areas because of being more accepting of cannabis in general.

As for its plans being too ambitious, I don't see that as an issue. Those that end up being market leaders on the production side of the business are going to have to produce a lot of cannabis to enjoy the flexibility it offers them. I don't see how, over time, the smaller producers are going to be able to survive once recreational cannabis demand approaches a ceiling.

Overall, the major problem I see for Green Organic is it simply has to show the market what it can do. That means it'll take patience to see how the company is able to perform once it starts generating revenue.

Positive catalysts

Probably the most important positive catalyst for Green Organic is its business model itself. The decision to compete primarily in the premium organic segment at a high production level does set it apart from most of its competition.

Once it ramps up production, and assuming it can sell at wide margins and generate positive earnings and cash flow, it will be rewarded by investors. It doesn't even have to do that immediately; it only has to show it's clearly heading in that direction.

Another huge positive catalyst for Green Organic is its expanding international presence, which is seems many financial pundit, writers and commentators aren't aware of or are discounting at this point.

Counting joint ventures and partnerships, it will compete in markets like Germany, United Kingdom, Italy, France, Spain, Denmark, Poland, Portugal, Switzerland, Portugal, Mexico, Ireland, and a number of smaller markets. It will primarily target the medical segment of those countries.

The good news to me is it's putting these things into place before it seriously ramps up its production. This should allow it to get everything in order so it can launch a relatively smooth entry into the domestic and foreign markets.

Again, under most circumstances falling behind its peers as it is perceived, would be a big negative for the company, but in the segment it competes in, it shouldn't limit its future growth potential.

Green Organic will focus on supplying the Canadian market first, but it will roll out its international strategy as supply becomes available.

Revenue, spending and its balance sheet

In this particular stage of its development, I'm really not interested in the revenue or losses reported in its earnings report, as they're not indicative of the performance of the company over the next year or two.

In the last quarter it generated C$2.4 million, with a net loss of C$14.1 million. During the quarter it spent C$46.9 million, with most of that coming from its construction of facilities.

That could be a concern in relationship to its burn rate, but when considering it has a hefty C$224.4 million in cash and restricted cash on its balance sheet, and revenue expected to start to climb in the latter part of 2019, this shouldn't be a serious issue with the company.

It should also have plenty left to spend on its international growth and expansion.

Conclusion

I don't think it's going to be too long before investors start to see the potential in the Green Organic Dutchman. In my view, it's more the uncertainty surrounding the inability to analyze the company yet because it hasn't entered into its growth stage, which is rapidly approaching.

Once that kicks into gear, the market will get a better feel for its performance. It'll also get more clarity with margins and earnings once it starts to generate revenue. After all, if there is little revenue, it's impossible to measure profitability and how long it'll take to achieve it. In my view, this is probably the biggest reason the market has held back in viewing the stock more favorably.

At this time the organic pot market is under served, and if Green Organic Dutchman can rapidly fill in the demand, it could enter into a prolonged growth phase which would reward shareholders nicely.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

 

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