Does Aphria’s Valuation Look Attractive in November?


Nov. 6 2019, Updated 2:46 p.m. ET

On November 5, Aphria (APHA) was trading at 6.76 Canadian dollars. Aphria’s stock price has increased by 8.9% since reporting its earnings for the first quarter of fiscal 2020 on October 15. Its better-than-expected EBITDA and net margin in the first quarter led the company’s stock to rise.

However, the weakness in the cannabis sector offset some of the increases in Aphria’s stock price. In analyzing Aphria’s valuation multiples, we considered its forward-EV-to-sales multiple. We also looked at its forward-EV-to-EBITDA multiple.

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Aphria’s forward-EV-to-sales multiple

On November 5, Aphria traded at a forward-EV-to-sales multiple of 2.11x compared to 1.62x on October 11. The surge in its stock price and a decline in analysts’ revenue estimates appear to have led Aphria’s forward-EV-to-sales multiple to rise.

Now, analysts expect Aphria to report revenue of 823.76 million Canadian dollars in the next four quarters. In comparison, the October 11 estimate was 931.49 million Canadian dollars. Analysts may have lowered their revenue expectations due to the slower rate of new store openings and delays in the approval of cannabis-derived products.

Despite its increased forward-EV-to-sales multiple, Aphria is trading below its historical average of 8.90x. On November 5, the company’s valuation multiple was well below its peers’ median valuation multiple of 2.78x. The forward-EV-to-sales multiple of peers Aurora Cannabis (ACB), Canopy Growth (CGC) (WEED), and Cronos Group (CRON) stood at 6.08x, 6.77x, and 7.40x, respectively, on that day.

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Aphria’s forward-EV-to-EBITDA multiple rises

Since Aphria reported its first-quarter earnings, analysts have lowered their EBITDA estimates for the next four quarters. On November 5, analysts expect the company to report adjusted EBITDA of 133.34 Canadian dollars in its next four quarters. This is lower than the October 11 estimate of 173.9 million Canadian dollars.

The reduced EBITDA estimates and its increasing stock price could have contributed to Aphria’s increased valuation multiple. On Tuesday, Aphria traded at a forward-EV-to-EBITDA of 13.04x compared to 8.67x on October 11. Despite the increase in Aphria’s valuation multiple, it’s trading below its historical average of 28.6x.

The above graph shows that Aphria is trading above its peers’ average valuation multiple of 8.11x. On the same day, Aurora Cannabis, Canopy Growth, and Cronos Group traded at forward-EV-to-EBITDA multiples of 32.9x, -71.0x, and -47.7x, respectively.

YTD stock performance

Aphria reported strong earnings for the fourth quarter of fiscal 2019 and the first quarter of fiscal 2020. However, its stock has fallen 13.9% YTD. The weakness in the cannabis sector appears to have dragged the company’s stock down.

On November 5, the Horizons Marijuana Life Sciences Index ETF (HMMJ) has declined 26.5% year-to-date. During the same period, the stock prices of Aurora Cannabis, Canopy Growth, and Cronos Group declined 27.3%, 28.5%, and 24.4%, respectively.

In our view, Aurora’s lower-than-expected Q4 earnings and analysts’ downgrade caused its stock to fall. Aurora plans to report its first-quarter earnings next week. For analysts’ estimates, please read Aurora Cannabis’s Revenue: Here’s What Analysts Expect.

The cannabis sector’s weak first-quarter earnings dragged Canopy Growth stock down. However, it’s launching new products to drive growth. For more detail, please read  Canopy Growth Is Set to Launch New Products.

The higher operating losses in the second quarter caused Cronos Group stock to fall. However, Piper Jaffray has a positive view of Cronos Group. Please read Cannabis Sector: Piper Jaffray Favors Canopy and Cronos for more.

For analysts’ ratings and recommendations on Aphria, please read Aphria: Why Jefferies Recommends a ‘Buy’. For more news and updates on the cannabis sector, please check out 420 Investor Daily.


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