Trouble at OrganiGram: Cooling Tower Concerns

Yesterday, CBC News reported the contents of an email circulated among OrganiGram (OGI) employees on August 13. According to the email, the company shut down several of its cooling towers and cleaned them due to high bacteria counts. The timing of this email coincides with a Legionnaires’ disease outbreak in western Moncton, New Brunswick, Canada. Health officials identified cooling towers as the source of the outbreak, though they did not reveal the exact source.

If OrganiGram is confirmed to be the cause of the disease outbreak, it may face multiple lawsuits. Furthermore, customers may start doubting the quality of OrganiGram’s products. Since the news broke, the company’s stock has fallen 2.25% to $3.48 on the Nasdaq. The stock is 1.88% lower than its closing price yesterday and trading at 4.70 Canadian dollars on the Toronto Stock Exchange.

On average, the 14 analysts tracking OrganiGram stock have set its target price at 11.62 Canadian dollars, which implies a 148.82% upside in the next year based on its current price. To see how analysts’ views have changed since August, read OrganiGram: Lower Target Price and Valuation Multiple.

Financial performance

OrganiGram stock has fallen gradually since the company started trading on the Nasdaq in May. It fell significantly when OrganiGram missed analysts’ Q3 estimates. In the third quarter, the company’s revenue rose 563.22% year-over-year to $18.96 million, but missed analysts’ forecast by $4.29 million. The company’s non-GAAP EPS of -$0.52 also missed analysts’ estimate, by $0.08.

Comparing OrganiGram’s valuation with peers’

OrganiGram’s EV (enterprise value)-to-sales multiple has been 7.13x in fiscal 2019. Analysts expect it to have EV-to-sales multiples of 3.43x and 2.37x in fiscal 2020 and fiscal 2021, respectively.

In comparison, Aurora Cannabis’s (ACB) EV-to-sales multiple is 26.28x in fiscal 2019, and analysts expect it to be 11.22x and 6.69x in in fiscal 2020 and fiscal 2021. They expect Canopy Growth’s (CGC) EV-to-sales multiple to be 14.89x in fiscal 2020 and 7.99x in fiscal 2021.

OrganiGram has been trading at a significant discount to Aurora and Canopy. However, analysts expect OrganiGram’s revenue growth to outpace ACB’s and CGCs. They expect OrganiGram’s revenue to grow 189.01% compounded annually from 12.43 million to 300.04 million Canadian dollars between fiscal 2018 and fiscal 2021. Meanwhile, they expect Aurora’s and Canopy’s revenue to grow 57.82% and 146.88% compounded annually. OrganiGram’s current slump could be an attractive entry point for investors.