This Marijuana Value Stock Just Got A Little Bigger

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The Canadian marijuana industry is budding before our eyes, and last week’s historic Senate vote is proof of this occurring. With a landslide vote of 56 in favor and only 30 against, Canada’s Senate approved the Cannabis Act, sending the bill back to the House of Commons for confirmation. It’s all but a formality at this point that adult-use cannabis will soon be legal in our neighbor to the north.

For marijuana stock investors, the legalization of marijuana in Canada means one thing: dollar signs. Legalization means the addition of up to $5 billion in annual revenue on top of what the industry is already generating from domestic medical cannabis sales and exports to foreign countries where medical weed is legal.

Introducing marijuana’s first value stock

Still, as is the case with practically all industries in the stock market, no two companies are alike. Despite strong growth estimates, some pot stocks are downright pricey when examined in the context of forward price-to-earnings or their PEG ratio, while others look like bargains. One of those bargains is a company I’d previously dubbed as marijuana’s only value stock, albeit it’s now sharing that title with another producer.

In terms of value, it’s really difficult to top OrganiGram Holdings. Even following a trailing-one-month surge of 34% in its share price, OrganiGram’s forward price-to-earnings ratio is just 32. Though that is higher than traditional fundamental investors would usually like, its triple-digit sales growth in 2018 and 2019 more than makes up for a slightly higher forward P/E (which is why I’ve dubbed OrganiGram a “marijuana value stock”).

OrganiGram’s secret sauce continues to be its concentrated grow site in New Brunswick, as well as its product diversity. By choosing to expand its Moncton facility in New Brunswick, rather than expanding into new locations elsewhere, OrganiGram is able to internalize and better control its costs than any other major producer. And by major producer, I’m talking about any grower that’s expected to yield in excess of 100,000 kilograms once at full capacity. According to OrganiGram’s last update, it’s on track to complete the expansion of its Moncton facility in April 2020, with 113,000 kilograms of annual cannabis production representing its end goal. This should place OrganiGram among the top — perhaps — seven growers in the country, by yield.

Also working in OrganiGram’s favor has been its focus on cannabis oils and extracts. When most folks think about the legalization of marijuana, they’re drawn to the demand for dried cannabis. However, dried cannabis is a product that tends to become commoditized over time. Even with a large consumer pool, the niche demand created by cannabis oils and extracts is longer lasting. Sporting a higher price and considerably juicier margins, oils and extracts should help OrganiGram do more with every dollar in revenue it nets.

OrganiGram is spreading its wings

Of course, management isn’t just sitting by while the Moncton facility is being expanded. Last week, OrganiGram made a deal to expand its product line and appeal to the more than two dozen countries where medical marijuana is currently legal.

As announced on June 4, OrganiGram is investing $7.7 million ($10 million Canadian dollars) into micro-cap hemp producer Eviana Health Corporation, giving OrganiGram a 26% equity stake.

For Eviana, the deal makes perfect sense. As a developing hemp-based cannabidiol producer, it needs capital to complete its grow facilities. The deal with OrganiGram helps boost its balance sheet, taking any immediate cash concerns off the table.

However, the deal is even more impressive from OrganiGram’s standpoint. Assuming Eviana Health can get its hemp-based cannabidiol (CBD) operations off the ground — CBD is the non-psychoactive component of the cannabis plant that’s best known for its medical benefits — OrganiGram will have the option to purchase up to 50% of Eviana’s hemp-based CBD production for a period of five years. This offtake agreement will specifically help OrganiGram target foreign markets that’ve legalized medical cannabis.

What’s also notable is that, in addition to be a higher-margin product, foreign markets are considerably more likely to be OK with the sale of CBD oil than they are with the sale of dried cannabis. Not all of the aforementioned two dozen-plus foreign countries allow dried cannabis to be sold, nor are physicians particularly thrilled with prescribing a medicine that has to be ingested by smoking it. Comparatively, CBD oil is almost universally accepted — and favored by physicians. Said OrganiGram CEO Greg Engel:

This agreement is a key facet of our ongoing international expansion efforts. Our investment and concurrent offtake agreement with Eviana will provide OrganiGram with a source of low-cost, high-quality CBD for the burgeoning medical market within Europe. The proven cultivation and processing costing model that Eviana has developed will allow us to bring a range of innovative products to the global CBD marketplace.

OrganiGram’s biggest concern

Considering that OrganiGram grew cannabis oil sales by nearly 300% on a year-over-year basis, according to its most recent quarterly results, this deal looks like another smart move by management. But even marijuana value stocks have things to worry about. In the case of OrganiGram, the biggest concern has to be the possibility of being left behind by its peers.

As noted, OrganiGram has chosen to internalize its costs by expanding solely at its Moncton facility. Personally, I see nothing wrong with this decision, and it should indeed help to lower long-term production costs. If dried cannabis prices are commoditized over the long run, OrganiGram’s economies of scale should help it absorb any sizable reduction in per-gram prices.

The issue is that it’ll take until April 2020 before Moncton is completed, and it could take until late 2020, or even early 2021, before the company is operating at peak capacity. Having to wait so long may allow OrganiGram’s peers to secure lucrative long-term supply agreements with retailers and provinces, as well as form attachments with consumers. The early months of marijuana’s legalization should offer plenty of opportunity to land supply deals, but OrganiGram may not be up to speed to cash in on any of these deals. In short, it’s probably going to have to work harder than its peers to offload its product. That’s why focusing on oils and exports will ultimately be so important.

Exciting things are happening in Canada’s legal weed industry, and adding OrganiGram to your watchlist probably wouldn’t be a bad idea.