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Organigram (OGI) Reported a Strong Quarter, But Don’t Buy the Stock Just Yet

support@smarteranalyst.com (Ben Mahaney)

With some cannabis industry players in disarray, Organigram (OGI) proved that a focus on reasonable operations is still the best path to rewarding shareholders.

The stock has rallied over 17% this week following a solid FQ3’19 quarter and the company appears poised for more success. Whether or not the stock rallies back to previous highs near $8.50 is a far different story.

Focused Growth

Organigram is focused on domestic Canadian growth and the results are backing up this concept. The stock never got the wild valuations, but the FQ3 results are impressive considering that Canada isn’t producing the expected growth rates.

The company saw FQ3 revenues dip to C$24.8 million from C$26.9 million or the equivalent of about $19.0 million. The numbers continue to suggest that demand in Canada is questionable due to the impacts of the thriving illegal market and lack of legal retail stores, but the company is thriving regardless.

The reason the story works is that Organigram doesn’t need 10-fold production growth to meet operational costs. In the last quarter, the company only sold 3,926 kg of dried cannabis and 5,090 liters of oil.

With only C$11.1 million in quarterly operating expenses, Organigram is able to overcome the cannabis market weakness from a lack of retail stores in Ontario and the delay in Cannabis 2.0 products. In addition, the focus on the right balance of production growth has cash costs under control during the ramp up phase.

The company now has licensed capacity of 61,000 kg/yr with production capacity headed to 113,000 kg/yr by the end of 2019. With C$94.2 million in inventory, Organigram is taking the prudent move to reasonably expand production capability preparing the company for legitimate recreational cannabis growth in 2020.

Positive EBITDA

Instead of burning cash as the Canadian market slowly expands and chasing global markets not ready for commercialization, Organigram is focused on profitable growth. The company generated an incredible adjusted EBITDA profit of C$7.7 million in the last quarter or good enough for 30% EBITDA margins.

The company is not focused purely on massive cultivation numbers and the results are paying off. The stock has a market valuation of ~$1 billion now so sales around $175 million for FY20 won’t offer much of a bargain for the stock in a sector where sentiment is frayed.

Maintaining EBITDA margins in the 30%+ range will provide a boost to the stock as the year progresses. If FY20 EBITDA tops $50 million, the stock will eventually rally from higher EBITDA targets for FY21.

Takeaway

The key investor takeaway is that Organigram Holdings is a prime example of prudent growth winning out in the end. The Canadian cannabis company has costs under control leaving the company not reliant on wild industry growth in order to survive and thrive like industry players with substantial EBITDA losses.

Organigram likely outperforms the larger Canadian players with rich valuations, but the stock isn’t likely to see a big rally with the current negative sentiment in the sector. As cannabis-infused edibles and beverages hits the market at the end of 2019, the stock will likely offer a better entry point with a strong catalyst to rally than now.

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

Disclosure: No position.

 

Read more: Does OrganiGram Rely Too Much on Recreational Cannabis?

 

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