OrganiGram: Lower Target Price and Valuation Multiple

As of Monday, OrganiGram Holdings (OGI) was trading at 6.85 Canadian dollars.

OrganiGram’s stock price fell

OrganiGram stock has fallen by 9.9% since the company reported its third-quarter earnings on July 15. In the third quarter, OrganiGram’s revenues rose 784% year-over-year to 24.8 million Canadian dollars. Sequentially, the revenues fell from 26.09 million Canadian dollars in the second quarter. The company also reported a lower gross margin and EBITDA margin compared to the second quarter. The fall in OrganiGram’s revenues and margins might have led to a fall in its stock price.

In August, several prominent cannabis companies including Canopy Growth, Cronos Group, and Tilray reported their quarterly results. All three of the companies reported higher-than-expected net losses. The increased net losses and recent regulatory scandals lowered the company’s stock price.

OrganiGram: Lower Target Price and Valuation Multiple

Lower EV-to-sales multiple

The fall in OrganiGram’s stock price lowered its valuation multiple. As of Monday, the company was trading at a forward EV-to-sales multiple of 4.31x compared to 5.13x before the announcement of third-quarter earnings. The fall lowered the company’s valuation multiple below its average forward EV-to-sales multiple of 5.34x for the past seven months.

The fall in OrganiGram’s valuation multiple has brought it closer to peers’ median valuation multiple. The median valuation multiple is calculated from 12 cannabis companies mentioned in the above graph’s footnote.

OrganiGram: Lower Target Price and Valuation Multiple

OrganiGram’s average target price

In the above chart, you can see that analysts’ average target price has fallen from 11.98 Canadian dollars in June to 11.74 Canadian dollars. The lower average target price represents weaker sentiments. However, the company was still trading at a discount of 97.7% from analysts’ average target price. Among the 12 analysts that follow OrganiGram, 91.6% recommend a “buy,” while 8.3% recommend a “hold.”

Analysts’ recommendations

Analysts expect OrganiGram to report revenues of 96.9 million Canadian dollars in fiscal 2019 and 206.5 million Canadian dollars in 2020. The company’s revenues will likely rise 679.3% in fiscal 2019 and 113.2% in fiscal 2020. Analysts expect the company’s net profits to fall 13.4% to 16.3 million Canadian dollars in fiscal 2019. However, the company’s net profits will likely rise 146.8% to 40.2 million Canadian dollars in fiscal 2020.

Peer comparisons

Despite the recent fall in the stock price, OrganiGram continues to trade 41.5% higher this year. The company has outperformed CannTrust Holdings (TRST) (CTST) and Aphria (APHA).

Recently, CannTrust Holdings was hit by a series of regulatory scandals. Several media reports suggested that the company’s CEO and chairman knew about the issues. As a result, the company fired its CEO and asked its chairman to resign. All of these factors caused the stock to fall. CannTrust has lost 63.9% of its stock value this year.

On August 1, Aphria reported its fourth-quarter earnings. The company beat analysts’ top and bottom-line estimates. Aphria has become one of the very few profitable companies this quarter. The company’s management credited its strategic initiatives and growth plans for the impressive fourth-quarter performance. To learn more, read Aphria’s Strategic Growth Initiatives Drive APHA Stock.