Ready or not, earnings season has kicked off for the cannabis industry, with OrganiGram Holdings (OGI 0.54%) among the first to dish on its latest results.
In the company's fiscal first quarter, ended Nov. 30, OrganiGram delivered year-over-year net sales growth of 102% to 25.2 million Canadian dollars (about $19.3 million U.S.), which handily surpassed the CA$21 million in sales Wall Street had been looking for. The company's net loss of CA$0.9 million wound up reversing a big year-ago profit (which was largely aided by fair-value adjustments on biological assets), but that didn't stop OrganiGram's stock from skyrocketing 45% on Wednesday, Jan. 15.
While big gains in pot stocks have been fleeting of late, there's real reason to believe considerably better days lie ahead of OrganiGram. In fact, here are 10 reasons I believe OrganiGram is the best Canadian pot stock money can buy right now.
Image source: Getty Images.
1. It's a major grower
To begin with, buying OrganiGram is going to give you access to one of around a dozen major Canadian growers. By "major grower," I mean a company with peak annual output potential of at least 100,000 kilos. According to management, a fully operational Moncton campus in New Brunswick is capable of 113,000 kilos of run-rate production, which should make OrganiGram a popular supply deal candidate domestically, and potentially abroad.
2. OrganiGram has geographic advantages
One of the many factors that separate OrganiGram from its peers is that it's the only major grower headquartered in an eastern Atlantic province. Although provinces like New Brunswick and Newfoundland & Labrador are among the lesser populated of Canada's territories, cannabis-use rates among adults in these eastern provinces are much higher than the national average. That gives OrganiGram a foot in the door in what could be surprisingly lucrative provinces.
3. The company has wholesale agreements with every Canadian province
Keep in mind that while OrganiGram offers clear geographic advantages to Canada's eastern provinces, it's one of five Canadian licensed producers (LP) to have wholesale supply agreements in place with each of Canada's 10 provinces. It's worth noting that one of these five LPs, CannTrust, currently has its cultivation and sales licenses suspended, meaning OrganiGram has that much extra opportunity to seize supply market share throughout Canada.
4. Working from a single campus has its advantages
OrganiGram is also a rarity among major growers in that it has just the Moncton campus. Having only one operating facility should make it easier for OrganiGram to adjust its supply needs, expensing, and production to meet consumer demand. These adjustments would not be as easy for Aurora Cannabis and Canopy Growth, which have 15 and 10 cultivation facilities, respectively.
Image source: Getty Images.
5. Top-tier production efficiency
The Moncton campus is also incredibly unique given that OrganiGram employs a three-tier growing system. With cannabis plants stacked upward, rather than outward, the company is able to maximize its close to 500,000 square feet in cultivation space. This should lead to peak production potential of around 230 grams per square foot. By comparison, most major growers are likely to land between 75 grams per square foot and 125 grams per square foot at their core grow farms. That makes OrganiGram one of the most efficient growers in Canada.
6. A big focus on derivatives, with proprietary products
Like most major LPs, OrganiGram is also focusing heavily on high-margin derivative products. It spent CA$15 million on a line of fully automated equipment capable of producing 4 million kilos of infused chocolates per year and, more interestingly, developed a dissolvable powder that speeds up the process by which cannabinoids take effect. Both of these high-margin derivatives will go on sale during the first half of 2020, and they should be instrumental in expanding the company's margins.
7. The only Canadian grower with a no-nonsense quarterly profit
Even though OrganiGram wound up losing CA$0.9 million in the fiscal first quarter, it wound up doing something in the fiscal third quarter of 2019 that Wall Street hasn't seen any other Canadian grower do -- it produced a no-nonsense profit. Without the aid of fair-value adjustments or one-time benefits, OrganiGram's Q3 2019 net sales outpaced its costs of goods sold and operating expenses by CA$1.2 million. This may not sound like a lot, but it demonstrates just how far ahead of the field OrganiGram is in its march toward recurring profitability.
8. Expansionary costs are predominantly in the rearview mirror
Another consideration to be made here is that, since OrganiGram only has only one campus, its expansion cost are mostly in the rearview mirror. The company did announce that it would hold off on completing its Phase 4C expansion until market conditions merit additional production, but management believes it wouldn't take long to optimize output of 113,000 kilos per year. This reduction in build-out costs should help push OrganiGram toward recurring profitability.
Image source: Getty Images.
9. There are no financing concerns
Maybe the most important thing Wall Street and investors learned from the company's Q1 2020 report was that management believes it has more than enough capital available to fund its operations and capital expenditure plans. OrganiGram ended November with CA$34.1 million in cash and short-term investments, and it has CA$30 million in undrawn credit and CA$32.1 million in at-the-market offerings at its disposal. With financing a major concern for a number of cannabis stocks, this is a breath of fresh air for investors.
10. No goodwill on its balance sheet
Last, but not least, OrganiGram hasn't gone on an acquisition binge like many of its peers, meaning it has perhaps the cleanest balance sheet of all. With the industry lugging around perhaps $10 billion (or more) in goodwill from overpriced buyouts, OrganiGram's lack of goodwill means investors don't have to concern themselves with the possibility of a writedown.
These are the reasons I view OrganiGram as the premier marijuana stock to buy in Canada.
