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Will Aphria’s Q3 Earnings Lift the Cannabis Sector?

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As of April 9, Aphria (NYSE:APHA) was trading at 4.42 Canadian dollars—a fall of 37.7% since the announcement of its second-quarter earnings on January 14. The lower-than-expected second-quarter sales and lower fiscal 2020 guidance dragged the company’s stock price down. Also, weakness in the broader equity market contributed to a fall in the company’s stock price. Now, Aphria will likely report its third-quarter earnings, which ended on February 29, before the market opens on April 15. With a string of bad news lately, like layoffs and retail stores closures, will Aphria’s third-quarter earnings be the silver lining that the cannabis industry was hoping for?

Analysts’ revenue expectation from Aphria

Analysts expect Aphria to report revenue of 130.6 million Canadian dollars in the third quarter—growth of 77.5% year-over-year and a sequential increase of 8.3%. The company plans to expand its annual production capacity and focus on building its medical and adult-use cannabis brands to drive its sales. Currently, the company owns five brands. Aphria is a medical cannabis brand, while Solei, RIFF, Good Supply, and Broken Coast are adult-use cannabis brands.

I think that adult-use cannabis sales will rise during the quarter due to the introduction of Cannabis 2.0 products. Aphria has already introduced some of its vape SKUs in the markets. Meanwhile, the company continues to work on launching other Cannabis 2.0 products like edibles, teas, beverages, and topicals. In the second quarter, the company’s distribution revenue fell due to changes in the German government’s medical reimbursement model. However, the company’s management said that it would see normalized revenue growth going forward. So, I think that growth in distribution revenue will also contribute to the company’s revenue growth.

Aphria’s EBITDA should keep improving

Aphria has been posting a positive EBITDA for the past three quarters. Analysts expect the company’s profitability to keep improving. For the quarter, they expect Aphria to report an adjusted EBITDA of 4.18 million Canadian dollars—a rise of 52.1% from 2.75 Canadian dollars in the second quarter. The revenue growth, improved gross margin, and lower operating expenses will likely drive the company’s EBITDA. Analysts expect the company’s gross margin to improve from 25.3% in the second quarter to 28.8%. Aphria’s operating expenses will likely fall from 49.2 million Canadian dollars to 36.1 million Canadian dollars.

Outlook

After posting its second-quarter earnings, Aphria’s management cut its revenue and EBITDA guidance for fiscal 2020. They expect the company fiscal 2020 revenue to be 575 million–625 million Canadian dollars. Meanwhile, the company’s EBITDA should be 35 million–42 million Canadian dollars.

Analysts’ recommendations for Aphria

Last month, Bank of America upgraded the stock from “neutral” to “buy” and raised its target price from 5 Canadian dollars to 8 Canadian dollars. On March 10, Stifel started covering Aphria with a “hold” rating and a target price of 4.50 Canadian dollars. In January, Alliance Global Partners initiated its coverage on the stock with a “buy” rating and a target price of 11 Canadian dollars. Since Aphria reported its second-quarter earnings, Jefferies and Bryan Garnier have cut their target prices.

Wall Street analysts are bullish on Aphria. Among the 14 analysts, ten recommend a “buy,” while four recommend a “hold.” None of the analysts recommend a “sell.” As of Thursday, analysts’ 12-month target price was 9.55 Canadian dollars, which represents a 12-month return potential of 116%.

Stock comparison

So far in 2020, Aphria has lost 34.8% of its stock value. The company has underperformed its peers and cannabis ETFs. YTD, Cronos Group (NASDAQ:CRON) and OrganiGram Holdings (NASDAQ:OGI) have fallen by 18.9% and 20.1%, respectively. The ETFMG Alternative Harvest ETF (NYSE:MJ) and the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) have fallen by 33.1% and 31.3%, respectively.

I think that Aphria will deliver an impressive performance this year. There have been reports of increased cannabis sales in the last few weeks. With the US and Canada implementing social distancing guidelines, people are buying cannabis products to deal with the stress from isolation. I think that Aphria could gain from increased sales. While many cannabis companies struggle for capital, Aphria’s cash position looks strong. The company had 497.7 million Canadian dollars in cash and cash equivalents at the end of the second quarter. So, I think that investors should buy the stock before its third-quarter earnings.

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