Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

How Bad Was OrganiGram's Fourth Quarter?

By Cory Renauer - Nov 26, 2019 at 6:31AM

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

It wasn't exactly good, but management had some encouraging nuggets to share.

Investors who expected OrganiGram Holdings ( OGI 2.75% ) to report slightly positive earnings were all kinds of disappointed when the company instead reported a slight loss. The Canadian cannabis producer's bottom line missed by $0.15 per share and the stock slipped in response.

It's finally becoming clear to investors that selling marijuana is going to be a low-margin game. Luckily for its shareholders, OrganiGram looks like the only player that bothered reading the instructions first.

A cannabis leaf and cannabis buds on top of a Canadian flag.

Image source: Getty Images.

OrganiGram's earnings release for the fiscal fourth quarter ended Aug. 31, 2019, wasn't pretty, but the results weren't nearly as terrible as those posted by its larger competitors. Here are some of the encouraging points below the headline figures that you may have overlooked.

Technically positive

Cannabis with low levels of THC isn't easy to sell, and during OrganiGram's fourth quarter, the company had to set aside 3.7 million Canadian dollars to account for provinces returning subpar products. While that sounds terrifying, investors don't need to worry about this company's ability to produce cannabis that consumers want to buy. Most of the subpar products on their way back were part of a special order meant to help retailers fill empty shelves during last year's supply shortage.

During OrganiGram's fiscal 2019, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached CA$19.9 million. That means the CA$47.9 million cash balance on the company's balance sheet isn't about to disappear in a puff of smoke.

OrganiGram is still operating from a single facility in New Brunswick, which makes it a lot more efficient than its larger competitors. For example, Aurora Cannabis ( ACB 2.58% ) currently has 15 different production facilities on three continents, but the company can't afford to keep all the lights on. During the year ended June 30, 2019, Aurora reported adjusted EBITDA that was CA$155 million underwater.

Fiscally conservative

Instead of trying to dazzle investors with giant new facilities, OrganiGram's been squeezing more high-quality cannabis from a single location. That's a big reason sales, general, and administration (SG&A) expenses were just CA$33.2 million in fiscal 2019, or 41% of net revenue. During Aurora's fiscal 2019, out-of-control SG&A expenses soared to CA$271 million, or 110% of net revenue.

During the three months ended Aug. 31, 2019, OrganiGram received licensing approval for 17 new growing rooms that will bring annual production capacity to 76,000 kilograms. Until the provinces can get their act together on the retail end, OrganiGram will halt expansion projects. If it needs to meet higher demand, though, it can quickly boost annual production capacity to 113,000 kilograms by finishing a project that's already two-thirds complete.

Rows of marijuana plants in an indoor grow facility.

Image source: Getty Images.

Horticulturally competent

Bigger buds aren't necessarily stronger, but it's a good sign of a successful grow. In the fiscal fourth quarter, the average plant in OrganiGram's facilities produced 148 grams of dried flower.

Aurora likes to boast about its high-yield facilities, but the numbers suggest its growers could learn a lot from OrganiGram. Aurora doesn't report yields per plant harvested, but the company was expecting a range between 35 grams and 65 grams at the end of June. With the exception of certain strains that big producers usually avoid, experienced hobbyists would be fairly disappointed about a plant yielding just 65 grams.

Building a better brand

Nobody has figured out how to create a successful luxury brand yet, but fancy retail outlets and celebrity endorsements aren't working. OrganiGram is the only company I know of that hand-trims the big flowers that come off the tops of its plants and sells them separately as a premium brand.

The smaller, less desirable flowers that don't receive as much light during the growing process are still pretty good, despite running through an auto-trimmer. Marketing them as premium, though, would drive away customers who would feel cheated.

Medicine bottles and marijuana leaves.

Image source: Getty Images.

Putting it all together

Just because cannabis production is a low-margin business doesn't mean OrganiGram stock can't outperform the broader market, especially at its recent valuation. Despite the company being the best-managed big producer in Canada, its market cap has tumbled to just CA$525 million.

Fluctuating values for plants that grow from seed to harvest every few months will probably lead to lumpy earnings from one quarter to the next. Investors will still want to keep their eyes on OrganiGram, but it's important to consider a longer timeline before getting too excited about one negative, or positive, earnings report.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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
OGI
$1.87 (2.75%) $0.05
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$5.97 (2.58%) $0.15

*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
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

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

Our Most Popular Articles

Premium Investing Services

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