OGI - Organigram Holdings: Earnings Growth Set To Continue

2023-09-30 03:19:26 ET

Summary

• Growing brands and strategic positioning show OGI's future potential.
• Having overcome recent challenges, OGI is positioned to thrive in the changing cannabis industry.
• The company's earnings estimates for 2024 are promising, and its strong balance sheet and strategic investments make it an attractive investment opportunity.
• I'm Pink Sands Value Investor and I have over 20 years of investing experience. Follow us for more deep-value opportunities.

I haven’t written or thought much about investing in Cannabis companies until recently. While they have been on my radar for quite a while, I was waiting for the right time to consider jumping in. I considered the last “green rush” to be highly speculative and I found the people promoting it to be slightly naive. Given the recent trajectory of the sector, it appears that I was right. As more and more countries and states have legalized cannabis usage both medically and recreationally, I have begun to become interested. I’m interested in finding the companies that are likely to survive these difficult times and prosper from possible rescheduling of marijuana as a class 3 drug and a changing of federal banking restrictions.

One of the companies that has piqued my curiosity is Organigram Holdings Inc. (OGI), a Canadian company founded in 2010 and headquartered in Toronto, is a prominent player in the cannabis industry. Its diverse portfolio encompasses the production and sale of various cannabis and cannabis-derived products in Canada. For medical purposes, Organigram offers a range of products, including cannabis flowers, gummies, oils, and vaporizers, catering to both civilian patients and veterans. In the recreational sector, it provides adult-use cannabis products under multiple brand names such as SHRED, Big Bag O’ Buds, Monjour, SHRED'ems, Edison Cannabis Co., Edison JOLTS, Tremblant, and Laurentian. The company also specializes in cannabis edibles and concentrates. Furthermore, Organigram engages in wholesale distribution, supplying cannabis plant cuttings, dried flowers, blends, pre-rolls, and derivative-based products to retailers and wholesalers for adult-use recreational cannabis. I currently rate OGI as a speculative buy for the reasons I discuss below.

The past five years have been hard for cannabis companies and for OGI in particular. The stock price has fallen over 93% in the last five years and early investors have felt the burn seeing most of their investment go up in smoke.

Yet by surviving this crucible OGI has shown its strengths. These difficult times in the sector have allowed us to see which companies have prospects and which companies will likely collapse under the weight of their own aspirations. In regards to OGI, the company has been smart not to bite off more than it can chew and is poised to go from being a survivor to perhaps thriving over the next decade.

Earnings estimates for 2024 are $170 million dollars. A steady increase from the $155 million estimated in 2023 and the $145 million they actually earned in 2022. Right now earnings are growing at an increasing rate. As the cannabis industry grows, OGI should continue to benefit from its growth.

With total assets outstripping total liabilities by over $300 million, we believe that OGI is severely undervalued and should be trading at a market cap closer to this number. Although we would apply a significant discount because of the uncertainties inherent in the sector, we are still comfortable putting our fair value at around $2.50. This means that we consider the margin of safety to be quite large and this is using today’s numbers. If the company executes its plans which we highlighted below, we would have to revise our estimates upwards.

Beena Goldenberg, CEO, Earnings Call Highlights

"In Q3, the team at Organigram continues to position the company for sustainable long term success while navigating the short-term challenges present in the industry ."

Organigram's focus on long-term sustainability is a key for value-oriented investors, it signals that the company is not solely focused on short-term gains but is making strategic moves to secure its position in the industry.

"We were successful in the continued growth of our Canadian recreational business versus last quarter, with a 7% increase in net revenue driven largely by success in hash and a late rebound in flower."

Organigram's ability to achieve revenue growth, particularly in recreational cannabis, is a positive sign for investors. The mention of success in hash and flower sales highlights specific areas of growth within the company's portfolio, which can be valuable for investors to consider.

"We firmly believe that we have a responsibility to act ethically and responsibly in our regulated industry. We are dedicated to our consumers and believe they have the right to transparency when it comes to their label."

Organigram's commitment to ethical business practices and consumer transparency. For value-oriented investors, a company's ethical stance can be important as it can contribute to long-term brand reputation and customer loyalty. In an industry that will need to focus on long term health of users, organic growing without using harmful chemicals is an important way to stand out in the space.

"Given the strength of our balance sheet, Organigram can weather the financial impact of the rational pricing in THC fixing and as such, we are tackling the issue the right way."

A strong balance sheet is crucial for any company, especially in a volatile industry like cannabis. Organigram's confidence in weathering financial impacts suggests financial stability, which can be reassuring for value investors looking for companies with solid financial foundations. As many peers are having difficulty raising cash and perhaps seeing their current runway of cash running out, OGI can benefit from being one of the survivors. The strong balance sheet should also allow them to acquire other peers that are unable to raise additional funds at a discount.

"Our investment in Green Tank reaffirms our commitment to accelerating our focus on the vape category by delivering meaningful differentiation to consumers."

Organigram's strategic investments in innovative technologies, such as vape products, indicate a forward-looking approach. Value-oriented investors may appreciate the company's dedication to differentiation, as it can lead to competitive advantages in the market.

"Our investment in Phylos is consistent with our commitment to becoming the most advanced cannabis company in Canada."

The commitment to becoming an industry leader is a significant goal. Organigram's investment in Phylos, particularly in seed genetics, highlights its efforts to stay at the forefront of cannabis technology and innovation. Value investors may see this as a positive sign of the company's long-term growth potential.

"Operationally in Moncton, we have invested in a variety of efficiency improving and cost-cutting CapEx projects that will realize $7 million in annualized savings."

Efficiency improvements and cost-cutting initiatives can directly impact a company's profitability. Value-oriented investors often look for companies that are proactive in reducing costs while maintaining or improving product quality, as this can lead to better margins.

• "It's amazing to see how our Moncton facility has developed over the 10 years Organigram has been in operation."

A track record of consistent development and improvement in facilities can be a positive indicator for investors. It suggests that the company is committed to ongoing growth and optimization. This also provides OGI with a moat that should be difficult for new competitors to easily match.

"Our state-of-the-art Edibles production facility continues to drive impressive results, producing approximately 3.2 million gummies per month to support our SHRED'ems and Monjour brands.”

Specifics about the production capacity and success of certain product lines provide investors with tangible data. This quote highlights the company's capability to meet consumer demand and potentially generate revenue through branded products.

"We have positioned ourselves to drive further cost out of our facilities, we continue to focus on the consumer with our investments in innovation, and we have a strong balance sheet with responsible stewardship of capital, all geared to delivering shareholder value in the long run."

The focus on long term shareholder value is obvious and puts OGI in a strong position to continue to grow its market share and provide investors with returns.

Risks

Regulatory and Legal Risks: The cannabis industry is subject to stringent regulations, which can vary by region and change over time. Changes in regulations, legal challenges, or non-compliance with existing rules could significantly impact Organigram's operations.

Market Volatility: The cannabis market is highly volatile, and the stock prices of cannabis companies can fluctuate significantly. Factors like changes in consumer preferences, oversupply issues, or shifts in government policies can affect market stability and, in turn, Organigram's stock value.

Competitive Landscape: Organigram competes with other cannabis producers in Canada and potentially in international markets. Intense competition could lead to price wars, reduced profit margins, or difficulties in gaining market share.

Supply Chain and Production Risks: Issues related to cultivation, production, or distribution, such as crop failures, quality control problems, or supply chain disruptions, could impact Organigram's ability to meet demand and maintain product quality.

Financing and Capital Risks: Like many companies in the cannabis industry, Organigram may face challenges in accessing capital and financing due to the sector's uncertainties. Difficulty in raising funds or high-interest rates on debt can affect the company's growth plans and financial stability.

Final Thoughts

While I remained cautious during the last "green rush," I now see a changing landscape for cannabis companies. OGI stands out as a company with exciting prospects, growing brands and the possibility for strategic acquisitions.

Despite facing challenges over the past five years, Organigram has emerged as a survivor in the cannabis industry. The company's prudent approach and focus on sustainable growth make it a compelling candidate for long-term investors. Earnings estimates for 2024 show promise, and the company's current growth trajectory aligns with the expanding cannabis market.

One of Organigram's standout qualities is its robust balance sheet, with total assets significantly exceeding total liabilities. This financial strength provides a cushion in the volatile cannabis sector, which many competitors struggle to maintain. Additionally, Organigram's strategic investments in innovative technologies and a commitment to becoming an industry leader demonstrate its forward-thinking approach and have helped it create a small moat.

Operational improvements, cost-cutting initiatives, and a consistent track record of facility development add further appeal to Organigram's investment proposition. The company's state-of-the-art production facilities, like its Edibles facility producing millions of gummies per month, showcase its ability to meet consumer demand and drive revenue through branded products.

It is important to note that any cannabis company faces real risks. Regulatory and legal challenges, market volatility, competition, supply chain issues, and financing concerns are ever-present threats. Therefore, potential investors must weigh these risks against the company's strengths and growth prospects. This is also why I rate this as a speculative investment and should be a small piece of a diverse portfolio.

In my opinion, Organigram Holdings resents an intriguing opportunity in the evolving cannabis landscape. Its commitment to sustainable growth, financial stability, and innovation align with the long-term goals of value-oriented investors. Still, due diligence and a thorough understanding of the risks are essential before considering an investment in this dynamic sector. As always, please do your own due diligence prior to buying any positions and good luck investing.

For further details see: