Could Aphria Continue Its Magic in Q2 2020?

Aphria (NYSE:APHA) is set to release its fiscal 2020 second-quarter results tomorrow before the market opens. It was the only major cannabis company to report positive EBITDA in 2019. Other big players struggled to keep their profitability intact. Even though headwinds affected the entire sector, Aphria survived with its strong fundamentals and growth strategies. Let’s look at what to expect from the company’s second quarter.

Could Aphria’s stable growth continue in the second quarter?

In the second quarter of fiscal 2020, analysts expect Aphria’s revenue to grow 501.3 YoY (year-over-year) to 130.3 million Canadian dollars, but to fall 3.3% sequentially from 126.1 million Canadian dollars. Analysts foresee revenue of 146.0 million Canadian dollars in the third quarter, and 174.6 million Canadian dollars in the fourth quarter. Their forecasts put Aphria’s revenue growth at 148.1% YoY for the full fiscal year.

Aphria CEO Irwin Simon seems to have brought stability to the company. Amid short sellers’ allegations, its CEO stepped down, and Irwin Simon took over. Since then, the company has managed stable revenue and profit growth. Many feel Simon has made this happen. Meanwhile, other cannabis companies have struggled with low profitability due to demand and supply challenges. Recently, I discussed how cannabis demand after Canada’s legalization in 2018 led to the overproduction of marijuana. And in 2019, a lack of legal stores caused a supply issue, dragging down revenue for most cannabis companies.

Aphria’s profitability to rise in the second quarter

Simon focused on developing Aphria’s core business to solidify its ground in the cannabis space. I feel this move helped Aphria tackle the demand-supply imbalance last year and has helped it achieve profitability in the last two quarters. Aphria reported positive EBITDA of 0.2 million Canadian dollars in fiscal 2019’s fourth quarter, and 1.0 million Canadian dollars in fiscal 2020’s first quarter.

In the second quarter, analysts expect Aphria to maintain positive EBITDA growth. They think it could report a profit of 1.5 million Canadian dollars, compared with an EBITDA loss of 18.9 million Canadian dollars in fiscal 2019’s second quarter. Sequentially, that forecast represents 53.7% growth.

While more prominent cannabis companies focused on expansion through acquisitions and investments, Aphria kept a stable cash position. Aurora Cannabis’s (NYSE:ACB) rising debt hasn’t gone unnoticed. On the other hand, Canopy Growth (NYSE:CGC) (TSE:WEED) seems to be safer now because of Constellation Brands’ investment.

I’m not saying that investing in acquisitions is a bad strategy—Aurora’s and Canopy’s investments in developing world-class production facilities could reap benefits later on. If Cannabis 2.0 is a success, Canada could move forward with Cannabis 3.0 and 4.0 plans, which would demand better products. However, amid the cannabis sector’s uncertainties last year, Aurora’s and Canopy’s growth strategies were a bold move. Meanwhile, Aphria played it safe last year by not overspending. In contrast, HEXO had to reduce its workforce to cut costs.

Aphria is Jefferies’s top pick in the cannabis sector this month

Aphria’s focus on its core business and strengthening its brand has made it Jefferies’s top pick in January. To support that selection, the Jefferies analyst noted pointed out Aphria’s strong Canadian medical marijuana business. Moreover, Aphria increased its production capacity while keeping operational costs low, driving its EBITDA. Meanwhile, peers Aurora Cannabis, Canopy Growth, HEXO (TSE:HEXO) (NYSE:HEXO), and Cronos have reported negative profitability in their last quarters. In future quarters, these companies could again report EBITDA losses. Let’s look at analysts’ projections.

  • In fiscal 2020’s third quarter, they expect CGC to report EBITDA of -109.7 million Canadian dollars.
  • ACB could report EBITDA of -34.8 million Canadian dollars in fiscal 2020’s second quarter.
  • In fiscal 2020’s second quarter, analysts expect HEXO to report EBITDA of -14.7 million Canadian dollars.
  • Cronos could report EBITDA of -22.1 million Canadian dollars in fiscal 2019’s fourth quarter.

What dragged down APHA stock?

Despite the company’s good earnings results last year, Aphria stock suffered. In 2019, Aphria stock fell 13.1%. It fell less than CGC and ACB, which fell 27.0% and 58.7%, respectively, last year as demand-supply imbalances impacted the whole cannabis sector. As of Friday, Aphria had fallen 5.3% this year. Since the company’s first-quarter earnings release on October 15, APHA stock has fallen 9.0%.

Aphria’s management is hopeful for its future, and has reaffirmed its fiscal 2020 forecast for revenue of 650 million–700 million Canadian dollars and EBITDA of 88 million–95 million Canadian dollars.

We’ll have to wait and see if its second-quarter results can boost its stock, and to hear about its plans for fiscal 2020. APHA closed with a gain of 2.2% on Friday. Stay with us to know more about Aphria and the cannabis industry.