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Is Aphria a Good Cannabis Pick for 2020?

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Aphria (NYSE:APHA) has successfully strengthened its position not only in Canada but also in international markets. The company’s medical cannabis business is spread across Africa, Europe, South America, and Oceania. Aphria has an edge over its peers due to its ability to develop its brands through product innovation. The company reported impressive results in the second quarter of fiscal 2020, while the other cannabis companies struggled. We’ll see if Aphria is an attractive pick in the cannabis space in 2020.

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Aphria maintains its profitability

Aphria reported a positive EBITDA for the third consecutive quarter. The company’s adjusted EBITDA increased to 1.9 million Canadian dollars for the second quarter. Meanwhile, the company saw a 46% increase in adult-use cannabis revenue. The company’s net revenue rose 457% to 120.6 million Canadian dollars. While the average retail selling price of medical cannabis increased, the average selling price of adult-use marijuana declined in the second quarter. The decline was mainly due to the supply issue that many other cannabis companies faced in 2019. Aphria also reported a net loss of 7.9 million Canadian dollars.

Growth in 2020?

Despite the net loss, I still think that Aphria is positioned to drive growth in fiscal 2020. However, the company wanted to be cautious because of the current market dynamics. As a result, Aphria updated its guidance. The company expects that store rollouts could happen slowly. Also, vape products are banned in Alberta. Keeping these factors in mind, Aphria expects net revenue of $575 million–$625 million and an adjusted EBITDA of around $35 million–$42 million for fiscal 2020. The company ended the quarter with $498 million in cash and cash equivalents to drive more growth.

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Like its peers, Aphria has also worked to develop quality products for Cannabis 2.0 expansion this year. The company is launching 34 new vapes SKUs. The company will also launch edibles, peas, beverages, and topicals this year. Aphria already has market dominance in Germany. The expansion in the US market depends on federal cannabis legalization

Focus on product innovation

I’m confident in Aphria due to its drive to develop products. The company has always focused on improving brands and products that reflect consumer choices. Some of the company’s adult-use brands that have gained popularity are Solei, RIFF, Good Supply, and Broken Coast

Notably, the Aphria Diamond facility looks promising. The company expects robust growth from the facility by the fourth quarter, which could increase its revenue growth for fiscal 2020. Aphria has also increased its production capacity from its existing facilities to 255,000 kgs per year. The company is prepared to meet the demand from Cannabis 2.0 expansion this year. Aphria has also focused on developing its vape products. The company thinks that the vape market in Canada and the US will grow after the current vaping-related issues are resolved.

Aphria is also working on its international presence. The company targets markets that have legalized cannabis or could in the coming years. Mexico might legalize cannabis soon. The country plans to submit an amended bill soon for marijuana legalization.

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Irwin Simon has turned Aphria around

Irwin Simon has turned Aphria around. The company was crumbling when it got entangled in short-sellers’ allegations in December 2018. Simon has turned around Hain Celestial, which wasn’t a well-known food company. He founded Hain Celestial and contributed to its success for 25 years. Simon applied his knowledge and expertise to grow Aphria the same way he led Hain Celestial to victory. Aphria has reported consecutive quarters of profitability since Simon took over. Previously, I discussed how Simon made Aphria focus on its core operations, which strengthened its fundamentals. He believed that focusing on the company’s roots in Ontario would be more effective than international expansion. 

Today, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC)(TSE:WEED) are spread globally with high-class production facilities. However, they’re also struggling with lower revenues and negative profitability. Aurora Cannabis and Canopy Growth reported negative EBITDA in their recent quarters. Aurora Cannabis’s debt burden increased, while Aphria played it safe. The company’s confidence in maintaining its revenue and profitability momentum is outstanding despite the current headwinds. All of these factors show that the company is in a stable position.

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Analysts’ views 

In January, Jefferies selected Aphria as its top pick in the cannabis space. A Jefferies analyst thinks that the company’s strong medical cannabis industry in Canada and its international presence could drive its growth. Recently, I discussed how Jefferies went bearish on Aphria and bullish on OrganiGram (NASDAQ:OGI). I think that the analyst went bearish because Aphria cut down its fiscal 2020 outlook. Jefferies reduced Aphria’s target price. I also explained why Aphria lowered its guidance for 2020.

Currently, the stock has a majority “buy” rating with an average target price of 11.8 Canadian dollars. The stock has an upside potential of 56% for the next 12 months.

Attractive pick in the cannabis space

Profitability changes the face of a company, especially in a growing industry like cannabis. Notably, profitability shows to what extent a company could reduce its operational expenses. Reporting consecutive quarters of negative EBITDA impacted cannabis companies’ stock prices in 2019. External factors were also at play. Slower store rollouts in Canada and rising prices impacted companies’ results.

A lack of legal stores helped the black market boom. In the black market, there’s more supply. Also, marijuana is cheap with a lot of variety. As a result, black market sales rose, which dragged down legal marijuana sales. All of these factors weighed on Aphria.

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While the more significant players lost a considerable amount of their stock value last year, Aphria’s losses were minimal.  Aphria stock is a little ahead of its peers in terms of losses. In 2019, Aurora Cannabis and Canopy Growth lost 58.7% and 27.0% of their stock value. Meanwhile, Aphria saw its stock decline by 13.1%. In 2020, Aphria has gained 4.4% year-to-date. In comparison, Aurora Cannabis stock has lost 4.1%, while Canopy Growth stock has gained 16.4%.

The cannabis industry has always been a volatile sector. Regulations play a vital role in determining a company’s stability. Current market headwinds are pressuring Aphria. However, looking at how the company has maintained a strong balance sheet and continued profitability growth, it could perform better in the coming years. I think that Aphria is a good pick in the cannabis space. Investors should also be aware that cannabis is an evolving industry. They will need to have patience until investments show meaningful results.

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