OrganiGram is a New Brunswick-based cannabis grower that's attempting to take on some of the bigger names in the industry. Perhaps the most exciting news is a revision announced earlier this week that it expects to yield substantially more from expansion at its Moncton facility than it had originally predicted.
According to the press release, the company's data-driven model has been producing yields that are in some instances 50% higher than previously forecast. OrganiGram expects these higher yields to become the norm, not an anomaly. With improvements in cultivation and environmental design in its coming expansion phases -- the company is undertaking a four-phase expansion that's estimated to be complete in April 2020 -- along with economy of scale optimization in pre-vegetation and cloning processes, the company lifted its fully funded production forecast to 113,000 kilograms of cannabis a year, up from 65,000 kilograms.
Said CEO Greg Engel:
We are seeing some harvest yields that are more than 400 grams per square foot a year and have witnessed the quality, density and size of flowers improve tremendously. With these results we are revising our current production forecast estimates as well as those for our next expansion, set to break ground in April 2018, so that by early 2020 we will be producing over 110,000 kg/annum from fully funded operations.
Aside from simply outperforming expectations by a mile, OrganiGram has two production aspects that make it particularly attractive. First, as alluded earlier, its entire expansion is occurring at the Moncton facility, rather than spreading its facilities across multiple sites. Focusing on a single grow site should help internalize and minimize costs.
Second, OrganiGram hasn't been shy about promoting cannabis oils in its product portfolio. Oils and extracts are a considerably higher-priced, but higher-margin, product. Even though dried cannabis sales have fallen by 65,000 grams in the company's first-quarter operating results from the prior-year period, a better than quintupling in cannabis oil sales to 419,000 ml from 77,000 ml in the year-ago quarter sent total revenue more than 25% higher. OrganiGram will likely lean on oils and extracts to boost its margins in the years that lie ahead.
Yes, OrganiGram is a value stock Based on current Wall Street forecasts, OrganiGram is valued at 35 times its forward earnings for fiscal 2019. Though 35 times earnings isn't traditionally considered to be a value stock -- that's a higher P/E than the S&P 500 -- it is an incredible value when we look at the company's price/earnings-to-growth ratio.
In 2018 and 2019, Wall Street is expecting OrganiGram's respective sales to grow by 253% and 271%. However, analysts don't have much of a forecast beyond 2019. And, mind you, these forecasts don't include the company's recently upgraded production forecast. Even if OrganiGram generated 0% sales growth for 2020, 2021, and 2022, which is highly unlikely, its average five-year sales growth rate would still be 67%. That would place OrganiGram at a PEG ratio of just 0.52. Any PEG ratio below 1 is considered to be a value.
Based on this, OrganiGram appears to be a serious growth stock that's lurking in value territory. Aggressive investors with a stomach for volatility may want to give it a closer look.
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