Why are Shares of Aphria (APHA) up 30% in the past month?

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December 23, 2019 11:28am NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

This year will likely go down in history as the year the cannabis sector bubbled and burst, but one company seemed to weather the storm better than its peers, and that’s Aphria (APHA).

Aphria stock is up more than 30% in the past 5 weeks alone. Profitability is what has investors looking optimistically at this large cap stock. In the company’s most recent quarter, it reported a profit of CA$16.4 million out of CA$126.1 million in total sales.

Comparatively, Aphria’s largest competitors, Aurora Cannabis and Canopy Growth, net losses of CA$39.7 million and CA$374.6 million, respectively (out of revenues of CA$75.2 million and CA$76.6 million, respectively).

A large part of Aphria’s success comes from the company’s strategy to diversify outside of the Canadian market, which disappointed the cannabis sector across the board this year with the country’s slow-to-rollout retail expansion faced with black market competition.

Aphria made the smart play back in 2018 by purchasing German medical cannabis subsidiary, CC Pharma. CC Pharma ended up becoming one of Aphria’s main revenue drivers, accounting for nearly three-quarters of all sales in the company’s most recent quarter.

APHA is forecasting a fiscal 2020 revenue of around CA$650-700 million, with about half of that coming from CC Pharma. Aphria is also making moves in Latin America, with the company’s acquisition of LATAM Holdings.

Why Aphria stock seems like a deal

While most of the cannabis sector burned through its cash reserves this year, Aphria posted a quarterly positive EBITDA. And the company trades at a relative discount when compared to its peers.

APHA‘s current EV/Sales ratio is 6.7. By comparison, Aurora Cannabis has an EV/Sales ratio of 14, and Canopy’s EV/Sales ratio is 21.9. In terms of price-to-sale (P/S) ratio, Aphria trades at a 7.0 price-to-sales (P/S) ratio, which is well below its peers. Aurora Cannabis and Canopy Growth trade at 11.3 and 26.9 P/S ratios, respectively.

Aphria also touts a strong balance sheet, with $348.8 million in cash and short-term investments. While the company also carries a debt load of $356 million, the company has no problems obtaining credit.

Of the big five Canadian cannabis producers, Aphria ranks #5 in terms of market cap, yet comes in at #3 in terms of production capacity.

And while many of Aphria’s peers are gearing up for Canada’s soon-to-be legal edibles market, Aphria has yet to announce any major plays in this unproven market. However, last June the company did announce a partnership with Pax Labs to develop cannabis vape products, which are also part of Canada’s Rec 2.0 rollout.

Aphria CFO Carl Merton believes that vapes will eventually make up between 20% and 30% of the total adult-use recreational marijuana market in Canada. He sees a 10-20% split between marijuana-infused beverages, edibles and other new products.

The Pax partnership also positions Aphria to start making moves in the U.S. market. Aphria interim CEO Irwin Simon said that they are looking at the U.S. CBD market and that the company is “talking to multiple partners in regards to strategic opportunities.”

Aphria Inc. (APHA) was trading at $4.87 per share on Monday morning, down $0.12 (-2.40%). Year-to-date, APHA has declined N/A%, versus a 20.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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