Shares of Canada-based cannabis company OrganiGram Holdings (TSXV:OGI)(NASDAQ:OGI) rose close to 10% yesterday. The stock closed trading at $6.30 per share. OGI was listed as a public company on August 22, 2019, and closed trading on $6.51 that day. It reached a high of $6.85 on August 28 and a low of $5.5 on September 3.
OGI shares were trading higher after Oppenheimer analyst Rupesh Parikh started coverage on the stock with a “perform” rating, according to one Market Watch report. The report states that a “perform” rating from the investment bank indicates Parikh expects OGI to perform in line with the S&P 500 index.
Parikh remains optimistic about OGI’s positive EBITDA, which is not very common among high-growth cannabis stocks. The fiscal third quarter of 2019 (ending in May) was the fourth quarter in a row where OGI reported a positive EBITDA.
Revenue estimated to rise 485% in 2019 Analysts expect OGI’s sales to rise by 485.2% year over year to $72.74 million in 2019, up from $12.43 million in 2018. Sales are estimated to reach $155.09 million in 2020, a year-over-year growth of 113.2%. OGI is valued at $941.71 million, which is 13 times its 2019 sales. This valuation is in line with other cannabis companies.
While analysts expect OGI earnings per share (EPS) to fall 38.5% in 2019, its EPS is estimated to rise 162.5% in 2020. Comparatively, the stock is trading at a forward P/E ratio of 28.7, indicating that OGI is undervalued and has solid upside potential.
Analysts have a 12-month average target price of $8.82 for OGI. This indicates OGI stock is trading at a discount of 46.3% to the average estimate.
What will drive OGI sales higher? OGI is a licensed cannabis producer with a presence in all 10 Canadian provinces. OGI is, in fact, one of four licensed producers in Canada with a distribution agreement in all 10 provinces.
The company aims to grow global footprint via international partnerships with a focus on product improvement and innovation. The company has targeted to produce 113,000 kg of cannabis in 2019. According to the company presentation, OGI has invested heavily in biosynthesis to produce cannabinoids at a fraction of the traditional cultivation cost.
Similar to most marijuana manufacturers, OGI is looking to expand into Europe, which is the largest market for medical cannabis products.
OGI reported sales of $24.8 million in the third quarter of 2019. It sold 3,926 kg of dried flower and over 5,000 litres of cannabis oil. Almost 88% of sales were for adult recreational use, while medical sales accounted for 12% of revenue.
Focus on edibles and derivative products OGI and other cannabis peers will hugely benefit from the licences to sell edible products. These licences are expected to be granted by the end of 2019. OGI has allocated $48 million in capital expenditure to begin the construction of a facility to manufacture edibles and derivative products.
OGI will look to explore two of the largest segments in the edible and derivative market. The vaporizer pens and edibles account for 23% and 13%, respectively, of the recreational market in the United States.
It will be interesting to see if OGI will be able to beat leading cannabis players in terms of market returns going forward.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.
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