Why Did Raymond James Downgrade OrganiGram?

Previously, Raymond James was bullish on OrganiGram Holdings (NASDAQ:OGI). However, the firm downgraded the stock. On Monday, Cantech Letter reported that Raymond James downgraded OrganiGram from an “outperform” rating to a “market perform” rating. The firm also slashed its target price from 6.50 Canadian dollars to 5 Canadian dollars. The new target price represents a 12-month return potential of 122.2%.

Rahul Sarugaser of Raymond James stated that OrganiGram was proactive in making operational adjustments, like temporary layoffs and lowering its production, amid the COVID-19 outbreak, as reported Cantech Letter. However, Sarugaser added that these operational changes delayed the rollout of the company’s deep value brand, Trailer Park Buds. The delay led to a decline in OrganiGram’s market share in low-cost value offerings.

Meanwhile, Sarugaser expects the company’s cost of goods sold to rise from 0.53 Canadian dollars per gram in the second quarter to 0.80 Canadian dollars in the third quarter. He expects OrganiGram’s EBITDA to be negative due to the rise in the cost of goods sold and the fixed SG&A costs.

Sarugaser’s expectations from OrganiGram

OrganiGram will likely report its earnings for the third quarter of fiscal 2020 next month. For the quarter, Sarugaser expects the company to report revenue of 19.4 million Canadian dollars. The amount represents a fall of 16.4% from 23.2 million Canadian dollars in the second quarter. He also expects the company’s EBITDA losses to rise from 1.1 Canadian dollars to 2.6 Canadian dollars. The company’s cash balance at the end of the quarter could be 79.0 million Canadian dollars. The amount also includes the net proceeds from OrganiGram’s new equity offering of 49 million Canadian dollars.

Meanwhile, Sarugaser lowered his projections for fiscal 2020 and fiscal 2021. For fiscal 2020, he expects the company to report an EBITDA of 3 million Canadian dollars on revenue of 92 million Canadian dollars. For fiscal 2021, he expects OrganiGram’s revenue to be at 119 million Canadian dollars. He expects the EBITDA to be 24 million Canadian dollars in fiscal 2021.

Other analysts’ expectations and recommendations

Analysts’ consensus estimates for the third quarter are better than Sarugaser’s expectations. Overall, analysts expect the company to report revenues of 24 million Canadian dollars. Meanwhile, they project an adjusted EBITDA of 0.81 million Canadian dollars.

For fiscal 2020 and fiscal 2021, analysts expect the company to report revenue of 102.4 million and 165.6 million Canadian dollars, respectively. These expectations represent year-over-year growth of 27.3% in fiscal 2020 and 61.7% in fiscal 2021. Moving to the EBITDA expectations, analysts expect OrganiGram to report an EBITDA of 7.5 million Canadian dollars in fiscal 2020 and 40.9 million Canadian dollars in fiscal 2021. 

Overall, analysts are bullish on OrganiGram. Among the 15 analysts, 11 recommend a “buy,” while four recommend a “hold.” None of the analysts recommend a “sell.” As of Monday, analysts’ consensus target price was 4.66 Canadian dollars. The target price represents a 12-month return potential of 107%.

OrganiGram’s stock performance

So far this year, OrganiGram has lost 29.5% of its stock value. The lower-than-expected second-quarter performance and weakness in the cannabis sector dragged the stock down. However, the recent supply agreement with Canndoc, expanded medical cannabis offerings, and amendments to its credit agreement with Bank of Montreal limited OrganiGram’s downside. The company has underperformed its peers and cannabis ETFs. Aphria (NYSE:APHA), HEXO (TSE:HEXO), and Cronos Group (NASDAQ:CRON) have fallen by 13.9%, 50.7%, and 16.3% year-to-date, respectively. Meanwhile, the ETFMG Alternative Harvest ETF (NYSE:MJ) has declined by 24% during the same period.