According to Mordor Intelligence, the cannabis market is expected to grow at a CAGR rate of 18.1% between 2021 and 2026. This solid growth rate is expected to be fueled by the proven medicinal usage of cannabis, legalization of cannabis at a higher pace, and further diversification of the cannabis products portfolio.
The cannabis market remains highly volatile amid investors’ concerns regarding negative profitability and rapid increase in competition in the given market. As a result, the ETFMG Alternative Harvest ETF (MJ) lost around 10% over the past month compared to SPDR S&P 500 Trust ETF (SPY) 3% gains over the same period.
Keeping that in mind, today we're going to analyze and compare two cannabis stocks: HEXO Corp. (HEXO) and OrganiGram Holdings Inc. (OGI). HEXO is headquartered in Kanata, Canada, and produces, markets, and sells cannabis in Canada. OGI, which is based in Moncton, Canada, produces and sells cannabis and offers a variety of cannabis-related products such as extracts, oils, beverages, and others.
HEXO Corp. (HEXO)
Recent quarterly performance
On June 14, HEXO Corp announced its third-quarter earnings results. In Q3, HEXO’s revenue was up around 2.3% on a year-over-year basis to C$22.7 million. However, the company failed to beat Wall Street consensus estimates of C$34.6 million (missed by C$11.9). Also, its revenues were C$10.2 million down compared to Q2 2021 due to a decrease in adult-use non-beverage revenue in the province of Quebec. However, the company believes that the sales will rebound in the subsequent quarters. Also, there are some positive signs across HEXO's earnings report. For instance, its Q3 2021 total non-beverage adult-use net revenues, as well as net revenues obtained in Ontario, increased by 169% and 14% on a year-over-year basis, respectively.
The company’s EBITDA stood at (C$10.78 million) compared to (C$0.2) million in Q2 2021. HEXO’s gross profit margin came in at 9.72%.
Liquidity position
As of April 30, 2021, the company had total cash of C$81.03 million as well as C$19.04 million in trade receivables and total debt of C$73.9M. As of nine-month ended April 30, 2021, the company decreased its cash burn rate from C$16.8M to C$16.8 million. Based on that, we would expect the cash on hand to be sufficient for at least 12 months.
Analysts’ estimates & Valuation
For the fourth quarter, the analysts expect HEXO’s EPS to stand at ($0.06), representing a 95% growth compared to the year-ago value. Additionally, a $29.4 million average revenue estimate for the fourth quarter of 2021 indicates a further continuation of its growth.
Let’s take a look at some valuation metrics. In terms of Price-to-Sales (P/S) TTM, the stock’s 6.48x is 22.66% lower than the 8.38x sector median. Also, the company’s TTM EV/Sales multiple of 8.21x slightly discounted to the sector’s median EV/Sales ratio of 8.35x.
OrganiGram Holdings Inc. (OGI)
Recent quarterly performance
On July 13, OrganiGram Holdings Inc. reported earnings for the third quarter of 2021. In Q3, total revenue has risen 13% year-over-year to $20.3 million, beating Wall Street estimates by $6.72 million. OrganiGram’s net loss decreased 94% to $4 million from its year-ago value of $89.9 million.
The company’s EBITDA loss came in at ($10.78 million) compared to ($2.1 million) million in Q2 2021.
However, the adjusted gross margin stood at -4% compared to +23% a year ago which could be a concern for investors.
Liquidity position
As of May 31, 2021, the company had total cash of $55.88 million and total debt of $49.77 million, bringing its total net cash to $6.11 million. In Q3, cash burn rate increased significantly to $10.8 million from cash provided of $0.3 million in prior year. With that being said, if the cash burn rate will increase in the following quarters due to higher operating expenses and further drawdown
in margins profile, management could initiate a secondary stock offering to get additional cash. As a result, a possible dilution of shareholders' equity could negatively impact OGI stock.
Analysts’ estimates & Valuation
Currently, Wall Street expects OGI’s earnings to grow in the fourth quarter of 2021 to ($0.03) per share, exceeding its year-ago value of ($0.15). Besides, analysts forecast that its Q4 revenue could moderately increase to $18.3M.
Let’s take a look at EV/Sales and P/S multiples for OGI stock as well. When it comes to EV/Sales TTM, the stock’s 13.77x is 64.81% higher than the 8.35x sector median. Also, the OrganiGram TTM P/S multiple of 9.34x looks overvalued compared to the sector’s median P/S ratio of 8.38x.
Bearish options market outlook
Looking at the September 17, 2021 option chain, we can calculate the expected price movement using the options long straddle strategy. With that being said, my calculations imply that OGI stock could rise or fall by about 27.2% by the September expirations from the $2.50 strike price. This assessment would place the stock in a trading range of $1.94–$3.38 by the expiration date. Pay attention to the number of open calls and put contracts as well. In OIG’s case right now, we can see 6,654 open calls to 12,257 open puts. And this difference means that overall options market sentiment is currently rather bearish than bullish for OrganiGram stock.
The Bottom line
HEXO is in a solid position to generate long-term returns because of its healthy balance sheet and positive gross profit margin profile. However, OGI’s cash burn concerns, as well as bearish options market sentiment, could limit its upside opportunities.
In addition, in terms of valuation, HEXO looks undervalued compared to the sector based on P/S multiple, while the OGI P/S figure significantly exceeds the sector median threshold.
Hence, we believe HEXO, at these levels, is a better long-term buy.
HEXO shares . Year-to-date, HEXO has gained 24.73%, versus a 17.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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