There’s value in this medical marijuana stock

With the slow rollout of cannabis stores in Ontario, pot stocks have been beaten down. But that has made some of them more attractively valued.

Aphria Inc. is focused on producing and selling medical marijuana and its derivatives through retail sales and wholesale channels.

After initially getting upset at Aphria Inc.’s (TSX—APHA; NYSE—APHA) second-quarter results and outlook, investors appear to be once again enthusiastic about its stock. That wasn’t the case on January 14, when the company released its results. The shares ended the day down 8.6 per cent from their closing price the day before.

While Aphria’s top and bottom lines fell short of expectations, it also reduced its revenue outlook. For the 2020 fiscal year, which ends May 31, management now forecasts revenue of about $575 million to $625 million. That’s down from the $650 million to $700 million it thought it would bring in when it released its first-quarter results on October 15.

Healthcare stock Aphria is licensed to produce and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products in Canada. Its operations consist of its original Aphria One facility in Leamington, ON, BC-based Broken Coast, and a 51-per-cent stake in Aphria Diamond, also of Leamington. It’s also a leading global cannabis company with primary hubs in Germany—to serve the European market—and Colombia—to serve South America.

Revenue and earnings come up short

For the second quarter ended Nov. 30, 2019, Aphria lost $7.9 million, or $0.03 a share, compared with a profit of $54.8 million, or $0.22 a share, in the same period of 2018. The decrease was caused by lower non-operating income and finance income. Analysts had expected the company to lose $0.01 a share in the latest quarter.

Net revenue of $120.6 million fell short of the $129.8 million that analysts had projected. Nonetheless, net revenue was up 457 per cent from the year before. Distribution revenue was $86.4 million, up from $1.1 million last year.

But distribution revenue was down 9.3 per cent from the first quarter due to a change in the German government’s medical reimbursement model and seasonality at CC Pharma, Aphria’s European business. Consequently, management now anticipates slower growth from this business.

Net revenues from cannabis products rose 70 per cent year over year to $40.0 million. Notably, adult-use cannabis was up 46 per cent from the first quarter, to $29.0 million.

Aphria lowered its fiscal 2020 revenue outlook to reflect certain market dynamics including a slower-than-expected retail location rollout in Ontario with more than 40 store openings still pending. Currently, there are about 25 open. Other factors that will hurt growth are the temporary banning of vape products in Alberta while its government studies the impact of these products, the higher costs of third-party supply while Aphria Diamond waits for its licence, and slower growth at CC Pharma. But the outlook is still positive.

Cannabis outlook positive

Despite Aphria’s more subdued expectations for this fiscal year, the company continues “to believe the Canadian and international cannabis industry outlook is robust”. We agree with this assessment.

These past couple of years, cannabis companies have had to contend with many difficulties including pricing pressures, supply constraints and the slow rollout of cannabis stores in Ontario. Certainly the industry will probably grow more slowly than many had initially hoped. But growth will come, and from many sources. For instance, new markets are being opened up for cannabis beverages and edibles now that Canadian regulators have developed regulations for these products.

We believe Aphria is well positioned to grow with its industry. It’s closer to profitability than most of its peers and it has one of the stronger balance sheets in the industry. Aphria Inc. is a buy for above-average, long-term growth if you can tolerate higher risk and volatility.

This is an edited version of an article that was originally published for subscribers in the January 31, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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