Origin House (ORHOF) has been put on the cannabis map in a big way because of the attempt by Cresco Labs (CTST) to acquire the company. This has unfortunately taken the focus off of the actual performance of the company, as uncertainty concerning the deal being approved weighs on the share price of Origin House for now.
The most recent earnings report was a good one for the company, and when coupled with a recent decision by Weedmaps which will result in a significant reduction in cannabis sales in the California cannabis market, Origin House is positioned to benefit greatly from that action.
Cresco Labs acquisition not a done deal
Some investors consider the attempt by Cresco Labs as a done deal, as does management, which has stated it doesn’t believe it’ll fail in getting the deal done.
The C$1.1 billion offer by Cresco Labs appeared to be a sure thing in the early stage of the process, but it wasn’t long afterward that the Department of Justice requested more information concerning the proposed deal based upon the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Why that matters is these types of requests are related to issues related to reducing competition. Even though it’s being spun as not much more than a formality, in fact it could derail the deal and leave both companies as they were before the offer was made.
This is why looking at the fundamentals of Origin House is important, as the assumption should be made by investors that the deal won’t be allowed to go through. After all, some paid a premium price for the company based upon the idea it was going to go forward.
I’m not suggesting it isn’t going to be approved, as I think it has more than a 50 percent chance of being given the go ahead. But the company would take a hit if it is stopped, and investors should be prepared for the company to stand on its own merits either way.
With that in mind, there’s a lot to like about the future prospects of Origin House, whether it’s acquired by Cresco Labs or not.
California cannabis market has been a mess
A fallout from the policies associated with the California cannabis sector has resulted in a lot of customers going back to the black market as their source of supply.
The two major reasons for this are leaving up to individual jurisdictions concerning what is allowed, and second, the enormous taxes levied against cannabis sales.
Taking into account there are 58 counties and 482 incorporated cities and towns in California, it’s not surprising to see the disastrous consequences of each one deciding on the guidelines and laws associated with cannabis.
Not only are there different rules from city to city, but a county may have one set of rules, while the individual cities in the county have a different set of rules. It also means in many jurisdictions pot remains effectively prohibited. That’s important because many people have chosen to go back to the black market for their recreational pot supply.
Changing practices at Weedmaps is going to change this situation around.
As for the combination of state, local, and excise taxes, that could in a number of cases surpass the 40 percent mark, dependent upon the tax burden in each municipality. Not only has that pushed users toward the black market, but also to Nevada, where overall cannabis costs are much lower.
Weedmaps
Weedmaps is an Internet directory that allows marijuana dispensaries and users to connect with one another.
Until recently Weedmaps has allowed legal and illegal operators to advertise on the platform. About a week ago Weedmaps said that starting in the latter part of 2019, it was no longer going to allow illegal or unlicensed dispensaries on the platform. Weedmaps stated it will help unlicensed operators to go through the process of reaching compliance, but that will take some time to work itself out.
Upon hearing of the decision, some have suggested it could result in as much as 50 percent of illegal sales to be slashed in California. This is a potentially huge catalyst for Origin House.
The benefit to Origin House
The strength of Origin House in California is the distribution assets it owns. All legal cannabis products sold in California must be handled via licensed distributors.
Only a distributor can transport cannabis products in the state, and they are required to ensure all of their labeling and packaging is compliant with guidelines. They also act as the tax collector for all sales in the state.
So when Weedmaps announced it was going stop allowing unlicensed businesses on its platform, it means a huge swath of the black market competition will lose business to the benefit of Origin House and other distributors.
Since Origin House has acquired a number of important California distribution licenses and companies in California, it is positioned to take advantage of this major catalyst, which will drive revenue up in the quarters ahead.
With so much fragmentation in the California cannabis sector, this is going to be a welcome change to end-users in my opinion, and it will be a major catalysts for cannabis distributors in the state.
C$12 Price Target
Down by nearly 40% from its April highs, Origin House stock rides the rollercoaster of investor sentiment. But the good news for shareholders is that this sentiment may take a turn for the better. 4-star analyst Matt Bottomley is advising his clients to buy the stock, and he believes it could hit C$12 within a year. For perspective, Origin House’s stock closed at C$7.74 today, so this implies upside of about 55%. (To watch Bottomley’s track record, click here)
Conclusion
While the focus on many investors has been on the potential acquisition of Origin House by Cresco Labs, it has quietly went about generating strong sales, which are going to continue to improve going forward as the huge black market in California shrinks to the benefit of Origin House.
For those reasons, even if the acquisition is not allowed to go forward, the future of Origin House is very bright.
At its current share price level, there isn’t a lot of support remaining from the announced deal. If it doesn’t go forward, Origin House will take a hit, but I see it rapidly returning to where it is at now based upon the potential associated with new sales growth coming in the latter part of 2019 and into 2020.
However it plays out, I think Origin House is going to make shareholders happy.
