Why Jefferies Went Bearish on Aphria and Bullish on OGI


Jan. 21 2020, Published 11:25 a.m. ET

On January 2, Jefferies chose Aphria (NYSE:APHA) as its top pick for 2020 among cannabis stocks. Jefferies also increased the target price for Aphria stock trading on the NYSE. However, the increase happened before the company’s fiscal 2020 second-quarter results. Aphria reported its second-quarter results on January 13. OrganiGram (NASDAQ:OGI) reported its results for the first quarter of fiscal 2020 on January 14. Yesterday, Jefferies reduced the target price for Aphria and increased OrganiGram’s target price. Let’s discuss why Jefferies is bullish on OrganiGram and bearish on Aphria.

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Jefferies goes bearish on Aphria stock

On Monday, Jefferies reduced the target price for Aphria stock to 10.3 Canadian dollars from 11 Canadian dollars. The reduced target price implies a 56.7% upside potential for the stock trading on the TSE. Jefferies didn’t specify the reason for the cut. However, I think that Aphria’s weak outlook for fiscal 2020 might have made the analyst skeptical. Aphria reported strong results for the second quarter.

The company’s profitability grew for the third time in the last three quarters. Aphria reported an adjusted EBITDA of 1.9 Canadian dollars, which was higher than analysts’ estimates. Meanwhile, peers and big names in the cannabis space like Aurora Cannabis and Canopy Growth (NYSE:CGC)(TSE:WEED) are struggling with lower profitability. Although the company missed analysts’ revenue estimates, the revenue grew 457% YoY (year-over-year) to 120.6 million Canadian dollars.

However, Aphria cut its fiscal 2020 guidance for many reasons. The company cut its revenue and EBITDA guidance for fiscal 2020.

The new guidance expects the revenue to be 575 million–625 million Canadian dollars. The previous revenue estimates were 650 million–700 million Canadian dollars. The company also cut the EBITDA guidance to 35 million–42 million Canadian dollars.

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Why the lower guidance?

I think that the company is being practical considering what happened in 2019. After Canada legalized cannabis in 2018, there was hope that cannabis companies’ profits and revenues would soar. Demand wasn’ even a problem. However, the lack of legal stores caused a supply issue and the revenue and profitability suffered. Some companies increased their production anticipating higher demand, which resulted in lost revenue.

Although Canada has approved opening more legal stores in 2020, many factors could cause a delay. I think that Aphria lowered its fiscal 2020 guidance due to these factors. Although the company thinks that there are growth opportunities in 2020, it will take time for the opportunities to bear fruit. The company thinks that Ontario’s store roll-out plan and Alberta’s resolution for the ban on vape products will take a while. Management still hopes that the revenue and profit will increase in the second half of fiscal 2020.

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Some analysts also expect the problems that the marijuana industry faced in 2019 to repeat this year. As a result, they have kept the revenue and profitability estimates lower. Compared to the forecast of 591 million Canadian dollars in December, analysts expect 546 million Canadian dollars in revenue for fiscal 2020. For the fiscal 2020 EBITDA, analysts expect 30 million Canadian dollars compared to 42 million Canadian dollars.

Aphria’s average target price is 11.8 Canadian dollars, which is 68% higher than its closing price on Monday. The stock closed with a gain of 2.0% yesterday. Currently, 14 analysts cover Aphria stock. Among the analysts, three recommend a “strong-buy,” seven recommend a “buy,” and four recommend a “hold.”

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Jefferies goes bullish on OrganiGram

Jefferies went bullish on OrganiGram stock after it reported impressive results for the first quarter of fiscal 2020. The firm increased the target price to 5.5 Canadian dollars from 5 Canadian dollars. The company reported a positive EBITDA of 4.9 million Canadian dollars. OrganiGram also saw its gross margin increase to 11.2 million Canadian dollars YoY (year-over-year). The company beat analysts’ estimates and reported 25.2 million Canadian dollars in revenue in the first quarter. The company is all set with its Phase 4 and Phase 5 expansion plans, which will include an expanded version of Cannabis 2.0 products.

The average target price for OrganiGram stock is 6.2 Canadian dollars, which is 47% higher than its last closing price. The stock closed with a loss of 1.1% on Monday. Currently, 16 analysts cover the stock. Among the analysts, four recommend a “strong-buy,” eight recommend a “buy,” three recommend a “hold,” and one recommends a “sell.”

Jefferies is bearish on Cronos Group (NASDAQ:CRON) stock as well in January. The firm reduced its target price to $5.3 from $7.5.

Aphria and OrganiGram’s stock performance

All of the cannabis stocks bottomed out in 2019. However, Aphria’s losses were lower compared to its peers. In 2019, Aphria lost 13.1%, while Canopy Growth stock lost 27.0%. Meanwhile, Aurora Cannabis stock lost 58.7%, Cronos Group returned 32.1%, and OrganiGram stock lost 48.9% in 2019.

As of January 17, Aphria has gained 0.96% YTD (year-to-date), while OrganiGram has gained 33.0%. Aurora Cannabis has declined by 1.3%, while Canopy Growth has increased by 18.0%. So far, Cronos Group has gained 11.4% YTD.

Stay with us to learn more about the marijuana sector, stocks, and legalization updates.


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