OrganiGram Holdings Inc (CVE:OGI) Quiet Earnings Response Is a Positive Sign

Benjamin A. Smith
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OrganiGram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA: 0OG) earnings report today has been met with collective tepidness, from a price action perspective. Shares drifted lower after the attempted morning gap-up, with about 60% of the day’s trading volume occurring within the session’s first 15-minutes (as of 1:45pm). Investors puzzled by the response shouldn’t be, and we’re about to tell you why.

First, let’s recap OrganiGram’s solid earnings report, where it becomes among the first pure-play cannabis company to post a black Net Income number. That’s a significant milestone which shouldn’t be flippantly overlooked.

Three-months ended
February 28

Inc.

(Decr.)

Six-months ended

February 28

Inc

(Decr.)

(in $000 except EPS)

2018

2017

2018

2017

Gross sales

$ 3,219

$ 1,445

123%

$ 5,906

$ 3,675

61%

Sales recovery (return)

$ 469

$ (2,026)

n/m1

$ 469

$ (2,026)

n/m

Net sales2

$ 3,689

$ (581)

n/m

$ 6,375

$ 1,650

286%

Cost of sales (incl. indirect production)

$ (1,550)

$ (3,029)

           n/m

$ (3,340)

$ (3,808)

-12%

Gross margin (excluding FV adjustment)

$ 2,138

$ (3,610)

n/m

$ 3,035

$ (2,158)

n/m

FV adjust. on bio assets and inventories

$ 4,384

$ (367)

n/m

$ 5,106

$ (1,056)

n/m

Gross margin

$ 6,523

$ (3,977)

n/m

$ 8,141

$ (3,214)

n/m

Net income (loss)

$ 1,078

$ (5,755)

n/m

$ (324)

$ (6,511)

-95%

EPS (basic)

$ 0.009

$ (0.059)

n/m

$ (0.003)

$ (0.071)

n/m

EPS (diluted)

$ 0.008

$ (0.059)

n/m

$ (0.003)

$ (0.071)

n/m

Sales of (in thousands):

Dried cannabis flower (gr)

238

142

68%

433

402

8%

Cannabis oil sold (ml)

552

139

297%

971

216

350

Record net sales were booked for both Q2 and six-months ended February 28. Dried marijuana flower and refined cannabis oil both increased, with the latter really taking off: cannabis oil sales rose 450% for the six month period on a YoY basis. Record yields per plant were experienced in Q2, with the company projecting new lows in production costs per gram in Q3. In fact, just about every important metric saw soaring growth, from net sales to medical patient enrollment to cost of sales.

And of course the company delivered on the biggest metric of all: positive Net Income of $1.1 million dollars after all the bills were paid. 

Given that OrganiGram is executing their business model seamlessly through the still-early innings of cannabis sector pre-eminence, why have investors reacted with a collective shrug? The short answer is, investors don’t care about the profitability metrics. And that’s exactly why OrganiGram’s future is so bright.

When investors start reacting to earnings numbers, it’s a telltale sign of a maturing sector. Generally, analysts will publish EPS expectations and have internal “whisper” numbers which guide institutional flows post-results. Net earnings, margins, sales, etc. become the drivers of share price instead of hope, dreams and what could-be.

With investor unresponsiveness to today’s OGI report, it’s abundantly clear that the company is still in the promise stage, where forward growth is viewed as the ultimate arbiter of OrganiGram’s share price—not current results. In other words, investors are less focused on the now, and more focused on the future, which is where early-stage growth investors want to be positioned.

Rest assured, they’ll be a time where the OGI (and cannabis sector) growth rates start slowing, and investors will look more towards quarterly EPS, dividends, and free cash flow for direction. That endgame ultimately resides somewhere five or seven or ten years down the line. That’s a positive and natural expectation of the capital markets investment cycle.

But for investors hunting for the proverbial “10-bagger”, focus on execution rather than post-earnings reaction should be the defining guidepost. In the early stages, it’s the execution part which will sink 80% of the industry, gradually siphoning investment capital to the survivors. Increasingly, OrganiGram looks to be a part of the winning side.

While the black NI number is nice, it isn’t the meaningful takeaway of today’s earnings release. Hands down, it was execution—whether the market realizes it or not.

OrganiGram Holdings CEO Greg Engel talks about today’s earnings release and more with Midas Letter CEO James West

Technical Take

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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