CRON versus APHA December Valuation Update

This year, Cronos Group (CRON) missed analysts’ EBITDA estimates in all three quarters. The lower-than-expected performance and the weakness in the cannabis sector caused the company’s stock to fall by 34.9% as of December 24. The delay in the approval of cannabis-derived products, the slower opening of new stores, thriving black market sales, and vaping-related deaths all dragged the cannabis sector down.

YTD, the cannabis ETF, the ETFMG Alternative Harvest ETF (MJ), declined by 31.4%. Meanwhile, the S&P 500 Index (SPX) rose by 28.6%. Meanwhile, Aphria (APHA) posted an impressive performance in its last two quarters with a positive EBITDA. Only a few cannabis companies have managed to become profitable so far. However, YTD, Aphria fell by 16.6%. The weakness in the cannabis sector has dragged the company’s stock down.

Having discussed the YTD stock performance of CRON and APHA, let’s look at their valuation multiples. The cannabis sector is still in the growth phase and the majority of companies are not profitable yet. So, we have considered EV-to-sales and EV-to-EBITDA multiple instead of the much-used forward PE multiple.

CRON versus APHA December Valuation Update

CRON’s EV-to-sales multiple

As of December 24, Cronos Group was trading at a forward EV-to-sales multiple of 8.1x compared to 21.3x at the beginning of this year. The decline of 34.9% in its stock price and analysts’ raising their revenue estimates for the next four quarters have led to a fall in the company’s valuation multiple.

At the beginning of this year, analysts were expecting CRON to report revenues of $119.1 million Canadian dollars. However, they raised their estimates to $153 million Canadian dollars as of December 24. CRON completed its acquisition of four subsidiaries of Redwood Holding Group in September 2019. We expect these deals to drive the company’s CBD business in the US. During the third quarter, the company grew its distribution network in Canada by entering Alberta. All these initiatives could drive the company’s revenue.

APHA’s EV-to-sales multiple

Aphria traded a forward EV-to-sales multiple of 2.1x on December 24 compared to 2.8x at the beginning of this year. The fall in APHA’s stock price and analysts raising their revenue estimates for the next four quarters caused the company’s valuation multiple to fall. At the beginning of this year, analysts expected the company to report revenues of $624.7 million Canadian dollars.

As of December 24, they increased their revenue estimates to $802.2 million Canadian dollars. The licensing of the Aphria Diamond facility is expected to drive the company’s revenue. The facility has an annual production capacity of 140,000 kilograms.

From the above graph, we can see that CRON traded above its peers’ median value of 3.83x on December 24, while APHA traded below it. Meanwhile, both CRON and APHA are trading below their respective historical average valuation multiple of 22.3x and 8.9x, respectively.

CRON versus APHA December Valuation Update

EV-to-EBITDA multiple

At the beginning of this year, analysts expected CRON to report EBITDA of $38.1 million Canadian dollars in the next four quarters. However, they lowered their EBITDA expectations to -$48.4 million Canadian dollars as of December 24. With analysts expecting CRON to report negative EBITDA in the next four quarters, its forward EV-to-EBITDA multiple turned negative.

The increase in the company’s operating losses over the last three quarters and the expectation of pricing pressure going forward prompted analysts to lower their EBITDA estimates. As of December 24, the company’s EV-to-EBITDA multiple stood at -25.5x. This is compared to its historical average of 16.9x.

As of December 24, Aphria was trading at a forward EV-to-EBITDA of 13.2x. Meanwhile, the company traded at a forward EV-to-EBITDA of 9.6x at the beginning of this year. The decline in analysts’ EBITDA expectations drove the company’s valuation multiple. At the beginning of this year, analysts expected APHA to report EBITDA of $179.7 million Canadian dollars in the next four quarters.

As of December 24, they have lowered their EBITDA estimates to $127.6 million Canadian dollars. However, the decline in APHA’s stock price offset some of the increase in the company’s valuation multiple. As of Tuesday, APHA traded below its historical average of 28.6x.

From the above graph, we can see that APHA is trading above its peers’ median EV-to-EBITDA multiple of 8.4x. However, CRON’s EV-to-EBITDA multiple was lower than its peers’ median value.

Analysts’ recommendations

Analysts favor a “hold” rating for CRON. Of the 13 analysts, seven analysts favor a “hold” rating. As of December 24, analysts’ consensus price target stands at $12.50 Canadian dollars with 12-month return potential of 33.6%. For analysts’ opinions and recommendations, read Cronos Gets a New Price Target from Raymond James.

Analysts are bullish on APHA, with 10 of the 13 analysts favoring a “buy” rating. Also, analysts’ consensus price target stood at $12.45 Canadian dollars with 12-months return potential of 90.1%. For more, read Aphria: Update on Analysts’ Target Prices and Ratings. Vist 420 Investor Daily for more marijuana-related news and updates.