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OrganiGram: A No-Drama Cannabis Stock to Consider

With high profile regulatory and executive management issues at several high-profile Canadian cannabis companies, OrganiGram Holdings (OGI) should be rewarded for the relative drama free growth plans. The cannabis company continues to obtain proper regulatory approvals for right on time supply to meet market demand. The end result is the powerful combination of strong growth and solid margins.

Wall Street’s confidence on the cannabis stock speaks for itself; OrganiGram has received six 'buy' ratings vs. only 1 'hold' in the past three months. Meanwhile, the $9.94 consensus price target suggests a potential upside of 116% from the current share price. (See OGI's price targets and analyst ratings)

Timely Capacity Additions

In a market with numerous companies pursuing very aggressive capacity growth, OrganiGram is taking a slow and steady approach to expansion plans. Just as important, the company is obtaining regular regulatory approval from Health Canada for the new cultivation rooms.

The latest news has OrganiGram adding 17 additional grow rooms for another 15,000 kg/yr of capacity. The company has annualized licensed capacity of 76,000 kg. The new product from these rooms will be available for sale by the end of the February quarter.

The company has further Phase 4B and 4C cultivation rooms in the process along with a Phase 5 facility focused on edibles and derivative products. Instead of having these facilities already open without the demand or related markets open, OrganiGram is saving on costs for production lines already open when Cannabis 2.0 won’t start until mid-December.

The ultimate goal is to reach 113,000 kg of cannabis production by year end. Another smart move is acquiring hemp from an outside grower. instead of focusing a lot of work and effort into building a hemp farm, OrganiGram is focused on extraction and selling CBD products in Canada and potentially around the globe.

Market Focus

The focus on practical markets and reasonable capacity in relation to demand is a big part of why the company has strong margins and EBITDA profits. For FY19, OrganiGram has already generated positive EBITDA of C$27.8 million.

The move into Cannabis 2.0 in Canada again has the company focused on product depth, not breath. OrganiGram will focus on vape pens, chocolate edibles and dry powder beverages to cover the market with quality products that retail stores and provisional governments can rely on and not a wide breath of products where meeting volatile demand is costly and difficult.

By not chasing wild markets not even fully open for business yet, OrganiGram has strong gross margins in the 50% range with operating costs of only C$9 million per quarter. Not bad for a company with gross profits in excess of C$12 million in the last quarter.

With a market value of about $775 million based on 165 million shares outstanding, OrganiGram is relative value after the stock has dipped nearly 50% since the May high of $8.44.

Takeaway

The key investor takeaway is that OrganiGram continues to make the practical, drama free moves in an industry where a lot of companies have pursued irrational global expansion or wild cultivation targets. The cannabis company remains positioned to expand production growth right along with the growth in Canadian retail stores versus building up unproductive facilities and inventories awaiting a market.

The stock is down with the cannabis market as a whole. Investors need to distinguish between the winners and losers in the market when the next rally takes place as the companies struggling financially and full of drama won’t see the same bounce.

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Disclosure: No position.