Marijuana is expected to be one of the fastest growing industries on the planet over the next decade. This strong double-digit annual growth rate is a big reason why investors have flocked to pot stocks in droves over the past three-plus years.
However, things haven’t gone as planned, which really shouldn’t be much of a surprise. All next big thing investments eventually encounter growing pains, and the cannabis industry is currently contending with…
To our north, Canada is has been hit by regulatory and procedural concerns. Health Canada has been unable to work through a large number of licensing applications, while select provinces haven’t been accommodative to issuing nearly enough dispensary licenses. Meanwhile, we’ve seen high tax rates and a similar slow rollout of dispensaries in select states spurring sales in the illicit market.
These pot stocks have delivered no-nonsense operating profits
These issues have ensured that most pot stocks remain unprofitable. However, a small handful have bucked the trend and generated a real quarterly profit. By “real” operating profit I mean a profit without help from fair-value adjustments on biological assets, as well as other one-time benefits.
As an example, popular marijuana stock Cronos Group delivered huge profits in each of the past two quarters. However, these profits were the result of revaluing derivative liabilities (warrants) tied to an equity investment it received from Altria Group. Once all one-time benefits and costs are removed from the equation, Cronos is decisively losing money on an operating basis (i.e., on the basis of revenue, less costs of goods sold, and less operating expenses).
The following three cannabis stocks, though, have delivered a no-nonsense quarterly operating profit.
Don’t be fooled by claims of profitability from any Canadian cannabis growers. The only grower to our north that’s managed to deliver a real quarterly operating profit to date is New Brunswick-based OrganiGram Holdings (NASDAQ:OGI).
During the fiscal third quarter, OrganiGram reported $24.75 million Canadian in net sales, representing a 784% year-on-year increase. Not including fair-value adjustments, OrganiGram’s cost of sales totaled CA$12.47 million, with operating expenses rising to CA$11.11 million. This works out to real operating income of CA$1.17 million, without the frills. It may not be much, but considering the massive losses being reported by the likes of Canopy Growth, this is genuinely impressive.
OrganiGram’s keys to success have been its production efficiency and location. Being based in New Brunswick will help the company cater to eastern Canadian provinces, which is good news considering that adults in these Atlantic-based provinces tend to use marijuana products more often than the national average. Additionally, since OrganiGram only operates one facility (the Moncton campus), its infrastructure and supply chain costs are notably lower than its peers.
From a production standpoint, OrganiGram stands to produce 113,000 kilos when at full capacity. Given that OrganIGram is utilizing a three-tiered growing system at Moncton, its yield per square foot should come in around 230 grams. That’s considerably higher than its peers. It’s this focus on efficiency that’s, arguably, playing the biggest role in OrganiGram’s push to operating profitability.
Valens, which only began its extracting operations roughly a year ago, managed to produce CA$16.46 million in revenue in its fiscal third quarter. This compares to cost of goods sold of CA$3.65 million and CA$7.28 million in operating expenses, which was a tripling from the prior-year period. Even so, this works out to CA$5.52 million in real operating income during the most recent quarter.
How did Valens do it? Perhaps the biggest key is that Valens is signing extraction deals that are often for two or more years. Having landed a two-year cannabis and hemp extraction deal with HEXO totaling 80,000 kilos, and a deal with Tilray for at least 60,000 kilos of extraction annually, Valens is able to generate highly predictable fee-based revenue and cash flow. In an industry that’s been full of surprises, extraction services has been the exception to the rule.
The other factor at work here is demand. Valens is operating in a space that’s expected to see demand soar. With Canada legalizing marijuana derivatives last month (e.g., edibles, vapes, concentrates, topicals, and infused beverages), extracted resins, distillates, concentrates, and targeted cannabinoids are going to be a necessity for any successful marijuana products portfolio. Thus, Valens is a necessary middleman with…
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