Marijuana stocks rise after Organigram doubles revenue forecast

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Recreational pot sales are off to a strong start for Organigram Holdings Inc., and Chief Executive Greg Engel said he expect sales to double in the first full quarter of legal marijuana sales in Canada.

Organigram’s strong results suggest that other cannabis companies could generate the kind of sales that led to swollen market capitalizations across the sector — if they can overcome issues that have been plaguing the industry in Canada. Over the past year, licensed cannabis producers in Canada have struggled with crop failures, licensing challenges and lower-than-expected cannabis yields as they attempt to reshape a sector that was outlawed for nearly a century in Canada.

Organigram OGI, +19.16% OGRMF, +18.03%  stock closed up 18% Monday, and other pot stocks were largely up as well. Cronos Group Inc. CRON, +15.36% CRON, +15.98%  gained 15%, Canopy Growth Corp. CGC, +4.72% WEED, +4.87%  rose 4.7%, Aurora Cannabis Inc. ACB, +5.65% ACB, +5.97%  rose 5.7% and Aphria Inc. APHA, +2.93% APHA, +3.82%  rose 2.9%. ETFMG Alternative Harvest ETF MJ, +5.63%  , which tracks a basket of weed stocks, closed up 5.6%.

In its fiscal first quarter, which ended Nov. 30 — about a month and a half after recreational sales began on Oct. 17 — Organigram grew sales about 420% year-over-year to C$12.4 million ($9.4 million), excluding the effect of excise taxes. Many of its larger rivals have fiscal calendars that will include December when they next report earnings. The company said it expected fiscal second-quarter sales to double to roughly C$25 million.

During the first quarter Organigram sold C$7.7 million of recreation cannabis flower, C$1.5 million worth of oil and $275,000 worth of pot wholesale. The company has been building up cannabis inventory and expanding production facilities, and reported net income of C$29.5 million, which amounts to $C0.195 a share, in part due to new accounting rules related to how cannabis crops are valued.

Adjusted for changes to the value of its cannabis crop assets, among other items, Organigram posted fiscal first-quarter losses of C$623,000.

“There’s growth not only in terms of inventory but also biological assets,” Engel said when asked about the company’s outsize net income. “So it was a combination there.”

“As we’ve gone into the recreational market, our strategy has been to focus on Atlantic Canada,” Engel said in a phone interview with MarketWatch; the company did not hold a conference call after reporting earnings. “We didn’t want to overcommit in the nine out of 10 provinces we operate in.”

Organigram has also made sure that it has kept its supply of medical cannabis in stock to support patients around the country, and Engel said they have not run out of stock there.

Engel says that to keep pace with the ravenous demand for weed, the company has begun running its pre-roll packing operation 24 hours a day, every day of the week, which amounts to about 40,000 pre-rolled joints a day. Executives are also considering other product lines to shift to a similar breakneck pace. Packaging has been a bottleneck for the company for a number of reasons, including its move to automated means of production.

Organigram’s cost of growing pot fell to C$0.56 a gram, excluding depreciation and stock-based compensation. In the year-earlier period, pot cost the company C$2.12 a gram to produce. The cash cost per gram includes labor, materials and manufacturing overhead, among other factors.

Unlike many of its competitors, Organigram has made a big bet on indoor production space instead of greenhouse facilities or outdoor cultivation. Engel says that he thinks indoor marijuana is better product and that it will continue to command premium prices.

Organigram has also built up excess inventory and intends to work with a third-party processor to extract oil from the cannabis in order to prepare for the edibles market. At the moment, edible cannabis products — including beverages — are illegal in Canada, but the governing party is required under the Cannabis Act to set up a regulatory scheme by October of this year.

The new regulations are positive, Engel says, and they allow companies to developed “any product mix you can think of.”

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