Please ensure Javascript is enabled for purposes of website accessibility

It's Official! This Major Pot Stock Wants a Partner

By Sean Williams - Apr 17, 2019 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canada's only big Atlantic-based grower is seeking a cannabis-infused beverage development partner.

The marijuana industry is evolving at a truly incredible pace. After languishing for decades as an underground market, cannabis is now thriving legally in Canada and in roughly two-thirds of all U.S. states where medical marijuana laws allow physicians to prescribe the drug. With its legality progressing globally, the sky is seemingly the limit for the pot industry and marijuana stocks.

We're also just beginning to see capacity expansion bearing fruit for marijuana stocks. Although it's still very early on in the expansion process, some of the largest pot stocks, such as Canopy Growth and Aurora Cannabis (ACB -3.62%), have managed impressive early sales figures, with 97.7 million Canadian dollars and CA$62 million in gross revenue in their most recent quarters, respectively.

But what's arguably the biggest sign of the maturation process in the marijuana industry is the number of brand-name partnerships that have been forged recently.

Two businessmen shaking hands, as if in agreement.

Image source: Getty Images.

Representing a sign of maturity, partnerships blossom in the marijuana space

Last August, Molson Coors Brewing (TAP 0.89%) kicked things off when it announced a somewhat surprising 57.5%-42.5% joint venture with HEXO to develop, manufacture, and distribute nonalcoholic cannabis-infused beverages. Mind you, alternative cannabis products are still illegal in Canada, though Health Canada is expected to give additional consumption options the green light by this coming fall. Considering that Molson Coors is contending with precipitously falling beer market share in Canada, and HEXO is angling to expand its production line beyond dried cannabis, a tie-up made perfect sense.

Just two weeks after this announcement, Canopy Growth and Constellation Brands (STZ -0.14%) became more intertwined than ever before. That's because Constellation made its third -- and largest -- equity investment in Canopy to date, totaling $4 billion. The maker of Corona and Modelo beer now has a 37% equity investment in Canopy, which is a lot more serious than the simple joint venture between Molson Coors and HEXO. Constellation is expected to work with Canopy on developing a line of cannabis-infused beverages.

Then, in December, we saw Tilray expand an existing partnership with Novartis' generic-drug subsidiary Sandoz to distribute nonsmokable pot products globally. Tilray also formed a $100 million joint venture with Anheuser-Busch InBev to develop infused beverages.

This combination of up-and-coming marijuana producers and deep-pocketed, marketing-expertise-rich beverage companies is flourishing, and now another major pot stock is ready to find itself a partner.

A cannabis leaf floating atop carbonation in a glass, with cannabis leaves set to the right of the glass.

Image source: Getty Images.

This major cannabis grower is now actively seeking a partner

On Monday, April 15, Atlantic-based grower OrganiGram Holdings (OGI -3.20%) reported its fiscal second-quarter operating results. Aside from reversing from a small profit to a modest loss in the current quarter, mostly as a result of ongoing expansion at its Moncton campus, OrganiGram's sequential quarterly revenue more than doubled, and its adjusted gross margin, before fair-value adjustments of biological assets, came in near the top of the industry at 60%. 

But it wasn't OrganiGram's financial data that did most of the talking following its operating results. Rather, it was the company's announcement that it had "developed a shelf stable, water-soluble and tasteless cannabinoid nano-emulsion formulation that provides an initial onset within 10 to 15 minutes if used in a beverage." OrganiGram believes it's generated a unique infused beverage, but also noted that it has no plans to launch its own cannabinoid-infused beverage line.

What's truly exciting is that OrganiGram admits in its quarterly operating press release that it's "actively seeking a strategic partner with proven experience in beverage product development." Landing a partner would help OrganiGram, a company capable of 113,000 kilos of peak annual production, add yet another high-margin alternative sales channel (in addition to vaporizable pen technologies and edibles) beyond dried cannabis.

Two friends tapping their Coca-Cola bottles together while sitting and chatting outside.

Image source: Coca-Cola.

Two beverage partners that might make sense for OrganiGram

The big question is: What company should consider partnering with OrganiGram?

Although it's relatively small among the major growers, with only a single cultivation campus, OrganiGram provides superior yield, geographic competitive advantages, and supply deal partnerships in all of Canada's provinces, which is something only two other pot stocks can proclaim. In other words, it should be a hot commodity among brand-name beverage companies.

I'd suggest the first of two logical partnership opportunities is with Diageo (DEO 1.48%). The company behind Smirnoff, Johnnie Walker, and Guinness announced last year that it was interested in finding a partner to develop infused beverages. Unlike Molson Coors, which is seeking cannabis out of continued sales weakness in North America, Diageo's sales have been strong in North America. Instead, partnering with OrganiGram would give Diageo yet another line of high-margin, foot-traffic-generating products to penetrate the North American market.

The other potentially logical partnership would be with Coca-Cola (KO 1.63%), which had discussions with Aurora Cannabis last year that didn't end in a deal. Coca-Cola has said that it's monitoring the progress of the cannabis industry from the sidelines, but it may have been turned off by Aurora's aggressive expansion activity that would have diluted any equity investment into the company. OrganiGram, which sports a $1 billion market cap, is much smaller than Aurora and would likely be more willing than any of its larger peers to let Coca-Cola take the reins on any cannabinoid-based beverage development.

Regardless of the company that OrganiGram partners with, it's worth keeping a close eye on this pot stock moving forward.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

OrganiGram Holdings Stock Quote
OrganiGram Holdings
$1.21 (-3.20%) $0.04
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$60.98 (1.63%) $0.98
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$234.50 (-0.14%) $0.33
Diageo plc Stock Quote
Diageo plc
$182.27 (1.48%) $2.65
Molson Coors Beverage Company Stock Quote
Molson Coors Beverage Company
$51.23 (0.89%) $0.45
Aurora Cannabis Stock Quote
Aurora Cannabis
$2.93 (-3.62%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.