Aphria: Valuation Update after Its Q1 Earnings

On Tuesday, Aphria (APHA) reported its earnings for the first quarter of fiscal 2020. The company’s revenues missed analysts’ expectations, while its adjusted EBITDA and EPS were better than expected. Notably, Aphria reported an adjusted EBITDA of 1.0 million Canadian dollars and an EPS of 0.07 Canadian dollars.

Very few cannabis companies have reported positive EBITDA. Investors were concerned about increased operating losses in cannabis companies during their last quarter. So, the higher-than-expected EPS and positive EBITDA caused Aphria’s stock price to rise. On Tuesday, Aphria’s stock price rose to a high of 7.33 Canadian dollars. At the end of the day, the company was trading 15.5% higher from the previous day’s closing price. Now, we’ll look at Aphria’s valuation multiple after its first-quarter earnings.

Aphria: Valuation Update after Its Q1 Earnings

Aphria’s forward EV-to-sales multiple

After reporting its first-quarter quarter earnings, Aphria’s forward EV-to-sales multiple rose from 1.60x to 2.05x. The surge in its stock price and analysts lowering their revenue estimates have raised the company’s valuation multiple.

After Aphria reported its first-quarter earnings, analysts have lowered their revenue estimates for the next four quarters from 947.1 million Canadian dollars to 853.1 million Canadian dollars. Lower-than-expected first-quarter revenues and the expectation of a slowdown in cannabis sales across the sector during the second half of 2019 prompted analysts to lower their revenue estimates. On September 27, MarketWatch reported that Bank of America Merrill Lynch analysts expect the cannabis sales growth to be flat in the second half of 2019. They cited excess inventory, the slower rate of new-store openings, and delay in the legalization of cannabis-derived products’ sales to slowdown the cannabis sales growth.

Despite the higher valuation multiple, Aphria is still trading lower than its average forward EV-to-sales multiple of 8.90x since the beginning of 2017. Also, the company continued to trade lower than its peers’ median valuation multiple of 3.41x. We used the valuation multiple of 12 companies mentioned in the footnote to calculate the median value. On the same day, Aurora Cannabis (ACB), Canopy Growth (CGC) (WEED), and Cronos Group (CRON) were trading at a forward EV-to-sales multiple of 5.91x, 6.44x, and 7.35x, respectively.

Aphria: Valuation Update after Its Q1 Earnings

Forward EV-to-EBITDA multiple

As of Tuesday, Aphria was trading at a forward EV-to-EBITDA multiple of 10.80x—up from 8.27x on Monday. Overall, Aphria’s higher stock price and analysts’ lower EBITDA estimates led to a fall in the company’s valuation multiple. After Aphria reported its first-quarter earnings, analysts lowered their EBITDA estimates for the next four quarters. They reduced their EBITDA estimates from 182.8 million Canadian dollars to 162.4 million Canadian dollars. In the above graph, you can see that Aphria has been trading below its average valuation multiple of 28.57x since the beginning of 2017.

However, Aphria was trading above its peers’ median valuation multiple of 8.90x on Tuesday. On the same day, Aurora Cannabis was trading at a forward EV-to-EBITDA multiple of 28.9x. Meanwhile, Canopy Growth and Cronos Group’s EV-to-EBITDA multiples were negative.

Aphria’s YTD stock performance

Despite the increase on Tuesday, Aphria is still trading 8.7% lower on a YTD basis. Notably, weakness in the cannabis sector dragged the company’s stock price. During the same period, Aurora Cannabis, Canopy Growth, and Cronos Group have lost 26.7%, 27.5%, and 23.5% of their stock values, respectively.

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