OrganiGram Holdings, $OGI, surged on the news that British American Tobacco, $BTI, giant invested in the company and they are doing a joint venture. British American will have their own cannabis product. Organigram Holdings has the exclusive rights to produce the cannabis for BAT. This kind of deal will add significant volume to OrganiGram’s production. With economies-of-scale, OrganiGram’s financials will improve dramatically.
Even without the deal, OrganiGram was putting together an encouraging business. Over the past several quarters, they had achieved cash flow from operations profitability. This is a key milestone for a new-ish company to achieve. Cash flow from operations is defined as being profitable from a gross margin perspective. From there, as a company adds in additional revenues, the operating profits continue to increase. That would add to the total bottom line.
Then, you factor in the new joint venture. Effectively, this is a private label deal where all OrganiGram does is produce the products. Then, British American is free to promote their products on its own. Keep in mind, this is an $85B company by market capitalization. They have the capabilities with distribution and sales & marketing to promote any products in a significant manner.
Given all of this news, I wanted to break down the latest earnings releases and determine where OrganiGram is now, its current trajectory, and then try and factor in the new developments.
Here is a recent look at $OGI stock activity:
The initial news pushed the stock upwards about 50%. So, the question becomes: Is OrganiGram Holdings a good buy?
OrganiGram Holdings Revenues
Here is a look at the latest revenues from OrganiGram Holdings:
OrganiGram’s revenues dropped somewhat in March of last year. Since then, revenues have continued upwards. If its revenues continued upwards over the next year, it is possible that they print up to $100M in revenues over the next year.
This will add significantly to the bottom line. OrganiGram has already achieved positive cash flow from operations. This is an important metric to achieve for a company. Basically, a company’s products are being sold at a price point above cost-of-goods. Because of this metric, each additional widget produced by OrganiGram will add more and more to the bottom line.
Early estimates are that this will double the revenue picture for OrganiGram. So, while on its own, OrganiGram may become profitable in a short period of time, given a new flow of products through its manufacturing process via British American, Organigram will achieve profitability much more rapidly.
OrganiGram Holdings Margins & Operating Efficiencies
As stated in the earnings release, OrganiGram printed adjusted gross margins at 30%. Most of the very best companies out there are printing between 60% – 65% in gross margins. So, 30% leaves more room for an increase. As metrics like this are a driving force for a company, I see the lower number as an opportunity. Increasing revenues and margins are a natural objective for management. So, if we project into the future the potential of $100M in revenues, at 60% gross margins, this is $60M in gross profits.
There have been early projections that the joint venture will double revenues for OrganiGram. When I consider the size of British American and its network of distribution, along with its connections throughout the industry, I can see British American doing well.
Achieving a Higher Level
It may take a moment for them to achieve $100M in revenues if they are just starting out. Still, what if we projected $50M in sales?
If British American did achieve $50M and OrganiGram achieved $100M, this is $150M in total revenue for the next year. At 60% gross margins to OrganiGram, that puts $90M towards gross profits.
At the same time, OrganiGram’s metrics with costs will naturally improve with the addition of revenue generated by the private label partnership. Operating efficiencies are a mathematical equation of operating costs over total revenues. Total revenues are going to increase over the course of the next year. Then, as that happens, while operating costs will increase somewhat, revenue increases will outpace the operating costs. Effectively, OrganiGram will become more efficient on a cost basis by virtue of producing more products.
If OrganiGram Holdings simultaneously achieved a 35% level in operating efficiency, the bottom line improves significantly.
The Potential For The Future
Given a potential of $150M in revenues, and 60% in gross margins with 35% in operating efficiencies, this puts total operating profits at $37M. There would be an approximate 20% in taxes and financing fees with that leaving an approximate $30M in net profits. At nearly 300M in shares, that puts $0.10 in EPS towards any shareholder.
The S&P 500 has a 35x future earnings multiple. The stocks traded on the S&P 500 also have an average 3.5% annual revenue increase YoY. Considering that, most analysts use a far higher future earnings multiple. I have seen anywhere between 50x – 100x future earnings. Given this, that puts $OGI at between $5.00 – $10.00 per share in short order. It is currently trading at $4.00, within an easy shot of the low end of the future projection.
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