Organigram Holdings (NASDAQ:OGI) is just another one of the many Canadian cannabis companies struggling to get profitable. As a result, OGI stock is down 26% from its high of $6 on Feb. 10. Good luck with this company getting profitable enough to justify that price again.
In fact, in the past year OGI stock is up 208%, and, in fact, it is actually 233% higher year-to-date. I’m at the point with Canadian cannabis stocks where I won’t consider investing unless they have produced some form of profitability. So, the stock’s amazing rise so far this year, even with its recent decline, doesn’t faze me. Show me the meat!
Organigram’s Quest For Profitability
Organigram has had continuously falling revenue over the past year (except for the quarter ending August 2020). Gross revenue in the quarter ending November 2020 was down 11% year-over-year and its net revenue was down 23%.
Moreover, even its adjusted gross margin was down 30% year-over-year in its fiscal Q1 ending November 2020. This is not good. It is almost impossible for the company to produce positive growth with negative margin growth.
In fact, the company had negative EBITDA (earnings before interest, taxes, depreciation, and amortization) of 6.38 million CAD for the quarter. This represents negative 33% of its 19.33 million CAD in net revenue for the quarter. That is an atrocious EBITDA margin.
However, the company made a big point about this next reporting item. Its cash flow from operations (CFFO) turned slightly positive in the November quarter in the amount of 296,000 CAD.
Much of that came from changes in working capital that provided cash, such as withholding payments to suppliers. In addition, certain non-cash charges are added back to earnings.
However, most of the addbacks of non-cash charges related to costs relating to the stock price rise. GAAP requires that warrants get expensed if the stock rises and they become in-the-money. That lowers net income but gets added back in the cash flow statement.
Therefore, most of the underlying increase in CFFO had really nothing to do with the underlying operations and profitability of the company’s cannabis operations. That is why I am not impressed with its barely profitable cash flow this quarter.
What Analysts Think
In general, analysts are not impressed with OGI stock. For example, TipRanks reports that the average target price of eight analysts who have written on OGI stock in the past three months is just $2.34. That represents a potential drop of 47% from today’s price.
Seeking Alpha reports that 16 analysts have an average target price of $2.76. However, Marketbeat indicates that its survey of 12 analysts has a consensus target of $2.93.
The fundamental problem is that the company needs to prove to the market that it has a sustainable and profitable business model.
For example, this past quarter its average selling price was 3.31 CAD per gram, according to its latest SEC quarterly financial filing (page 8). This frankly is a headwind to its profit quest.
However, the company is hoping to sell more edibles and cannabis beverages. This is because more people are “not interested in smoking or vaping” cannabis. The problem is its “other” and international revenue represents just 1% or so of total gross sales. The sad fact is it makes most of its money from selling cannabis products.
What To Do With OGI Stock
I suspect that until the company can get into cannabinoid (CBD) sales or related items to diversify solely out of cannabis, its margins will be paltry.
There is some light at the end of the tunnel. In its earnings statement, Organigram said that it is cutting manual labor costs through automation equipment. As a result, it said this about potential future profits:
“… a number of cost reduction opportunities has been identified which have the potential to benefit margins starting in Q4 Fiscal 2021.”
However, there are no profit forecasts, no margin target numbers, and no forecasts of continuing CFFO profits. Until Organigram can produce these forecasts or prove them with actual numbers, OGI stock is going to be stuck in a rut. Most investors will want to avoid it until it has real prospects of becoming profitable, in any form of that word.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.