In spite of more sobering marijuana stocks news of late, over the past several years the industry experienced the throes of tremendous growth and Wall Street took notice. The majority of marijuana stocks have, in fact, tripled or quadrupled in value over the course of the trailing two-year period. Valuations were further raised by the anticipation of Canada’s legal recreational use market late this summer and an overall shift in public opinion regarding cannabis.
Though growth prospects are high and lofty among valuations, some investors feel these valuations have become over-inflated in the cannabis industry.
Valuations might be over-inflated for many marijuana stocks to invest in, but, one in particular has stood out as a consistent exception with its PEG ratio and price-to-earnings ratio.
OrganiGram Holdings (NASDAQOTH:OGRMF), known also as a “marijuana value stock,” has consistently performed better than its peers in the area of its forward price-to-earnings ratio (which has been low), and the PEG ratio has safely remained below what is considered cheap. The company delivered its Q2 results late April accompanied by a record for quarterly profits.
Take a closer look at what potential investors can get excited about in Organigram’s Q2 operating results as well as the lingering concern all marijuana stocks investors need to keep in mind.
As a marijuana stock to invest in, the Q2 OrganiGram operating results, which revealed record profits and sales, presents exciting prospects.
With Canada moving toward legalization of recreational marijuana and the continued expansion of the country’s medical marijuana market, the OrganiGram Q2 results shouldn’t come as a shock to many in the industry. As the quarter progressed and the number of registered medical patients climbed to 13,000, the company’s gross sales soared 123% to a total of $2.51 million. Sales of dried cannabis only increased 65% from the same quarter last year, but, cannabis oil sales were another matter altogether.
The volume of cannabis oil sales increased 297% from Q2 last year, jumping from 139,000 milliliters to 662,000 milliliters. These higher priced, higher margin sales provided a significant boost to the company’s bottom line, helping push them further into the black.
As far as profits are concerned, OrganiGram ended the quarter with CAD$1.08 million, translating to roughly $0.01 per share. This figure may seem insignificant; however, it indicates the vital role of cannabis oils in boosting company margins in the midst of expensive, long-haul expansion. OrganiGram’s record crop yields from Q2 are also worth noting, having played a role in the company’s success. In the coming quarter, OrganiGram predicts a record low for its production costs as well.
Overall, the marijuana stocks company finished the quarter in a far better financial position than the year prior during the same period.
Its balance sheet boasts a cash amount of $41.4 million and short-term investments worth $96.7 million, helped along by an equity financing at the end of last year and a convertible debenture offering finalized in January.
On this topic, OrganiGram CEO, Greg Engel stated, “[We] have also significantly bolstered our balance sheet and, from an operational and sales and marketing perspective, we are well positioned to take full advantage of not only the medical market, but, also the burgeoning adult recreational and international opportunities as well.”
This balance sheet capital ensures OrganiGram will be in a good position to fund its four-phase expansion, thereby increasing its yearly cannabis production to 113,000 kilograms.
Come June, OrganiGram projects its yearly run rate of cannabis to be around 36,000 kilograms. The company will provide a revised brand strategy this month in anticipation of Canada’s legal recreational market.
Even with these strong metrics in its favor, OrganiGram falls prey to dilution, the silent killer of all marijuana stocks.
Investors who have been around the industry for a while are familiar with the difficulties marijuana stocks face in accessing financing. In other words, it is extremely limited. Uruguay aside, marijuana remains illegal in every country in the world; this fact alone means financial institutions providing basic services to cannabis companies, such as banking, could face criminal penalties or fines. Marijuana businesses are forced to turn elsewhere for raising capital, with few options available.
Marijuana stocks in Canada most frequently chose the route of bought-deal offerings to get around this issue. In bought-deal offerings, companies offer convertible debentures, common stock, warrants, and/or stock options in order to receive capital. These types of offerings are simultaneously good news for the marijuana industry, as they are hugely successful in providing capital, and bad news for investors holding existing shares. The bad news for shareholders is bought-deal offerings raise the outstanding share count for a publicly-traded company, which leads to dilution of the existing shares’ value. This way of raising capital can also make the task of delivering desirable per-share profits much harder for companies, with the additional negative of ballooning a company’s share counts for more than a few years.
Per the Q2 filing for OrganiGram, the marijuana stock’s listing in Canada reported 131.9 million for its weighted average of outstanding shares on the basis of dilution.
Compared to the same figure in the Q2 of the previous year, this figure was 36% higher (translating to nearly 35 million shares). Factoring in the recent $90 million convertible debenture offering, however, these notes may one day be converted to common stock. Additionally, as of the end of February, the company reported an excess of 8.1 million outstanding warrants.
The take away from all this is, even a marijuana value stock (such as OrganiGram) is not immune to the long-term effects of dilution. Current and prospective investors looking for marijuana stocks to buy now should keep this in mind when considering OrganiGram or any other marijuana stock.
(For more encouraging quarterly operating results, read 3 Reasons to Congratulate the Q3 Results for Aphria Stock.)