So far this year, the cannabis sector has underperformed the broader equity markets. The ETFMG Alternative Harvest ETF (NYSE:MJ) has declined by 23.5%, while the S&P 500 Index has fallen by just 1.4%. Lower-than-expected demand for Cannabis 2.0 products, robust black market sales, higher operating losses, and cash constraints have dragged the cannabis sector down.
Amid the current situation, let’s look at the cannabis stocks that will likely report their earnings this month—Aphria (NYSE:APHA) and OrganiGram Holdings (NASDAQ:OGI). Aphria has outperformed cannabis ETFs and its peers YTD.
So far, Aphria has lost 14.0% of its stock value. The company’s stock price fell due to weakness in the cannabis sector and issuing new equity shares to repurchase convertible notes. However, the company’s impressive third-quarter performance limited the downside. Meanwhile, Aphria’s subsidiary in Malta received EU GMP certification in May, which also offset some of the declines.
OrganiGram has fallen by 34.8% YTD. The weaker-than-expected second-quarter performance dragged the stock down. Earlier this month, OrganiGram’s management announced that it slashed its workforce by 25% and lowered its production capacity to match the demand. Management said that the company’s revenue could be lower than its second-quarter revenue due to a significant decline in the wholesale revenue.
These announcements had a negative impact on the company’s stock price. So far this year, Aphria has outperformed OrganiGram. Let’s look at analysts’ expectations for the next four quarters.
Aphria in the next four quarters
Analysts expect Aphria to report revenues of $631.8 million in the next four quarters. The company’s management will focus on the medical and recreational sectors to drive its sales. In May, ASG Pharma, the company’s subsidiary in Malta, received EU GMP certification.
The certification could boost the company’s sales in Europe. In Canada, the company will focus on compelling value and product differentiation to drive its sales. Management announced that it will introduce Cannabis 2.0 products, edibles, beverages, and topicals soon. These new derivative products could unlock the company’s growth potential.
In the third quarter, Aphria started to operate its production facilities, Aphria One and Aphria Diamond, at their full capacity. These newly added capacities will increase the company’s production capacity and help bring its cash cost per gram down.
Due to the delay in licensing the Aphria Diamond facility, OrganiGram had to purchase 30 million Canadian dollars of dried flower in the last two quarters to meet the demand. The purchases put pressure on the company’s margins. Now, with Aphria One and Aphria Diamond operating at full capacity, I think that the company’s EBITDA margin could expand.
For the next four quarters, analysts expect Aphria to report an EBITDA margin of 9.3%. The estimate represents a significant improvement from 1.9% in the same four quarters last year. Also, the company’s cash position looks strong with net cash of 515.1 million at the end of the third quarter.
What to expect from OrganiGram
Analysts expect OrganiGram to report revenues of 117.2 million Canadian dollars. The estimate represents a rise of 31% from 89.4 million Canadian dollars in the same four quarters of the previous year. OrganiGram was one of the few companies to launch Cannabis 2.0 products as early as December 2019. Currently, the company has launched a portfolio of vapes and cannabis-infused chocolates in recreational markets.
The Cannabis 2.0 products contributed 13% of the company’s total revenue in the previous quarter. Recently, OrganiGram also launched an additional lineup of Cannabis 2.0 products. The products target the recreational and medical sectors. Meanwhile, the company delayed the launch of its beverages and Ankr product lineup to focus on vapes and chocolates.
Notably, 52% of OrganiGram’s revenues came from Cannabis 1.0 products. The company’s compelling value offerings led to a rise in its sales. OrganiGram has one of the lowest cash costs per gram at 0.53 Canadian dollars. The company has been able to market its product at a competitive price. Going forward, OrganiGram could face tough competition from Aurora Cannabis (NYSE:ACB) and HEXO (TSE:HEXO). They have also launched their value products.
Moving to EBITDA margins, analysts expect OrganiGram to report an EBITDA margin of 10.9% in the next four quarters. The amount is a significant improvement from a loss of 10.9% in the previous four quarters. At the end of the last quarter, OrganiGram’s cash and cash equivalents stood at 41.2 million Canadian dollars. In April, the company strengthened its liquidity by raising 49 million Canadian dollars of liquidity through new equity offerings.
Overall, analysts are bullish on Aphria. Among the 12 analysts, ten recommend a “buy,” while two recommend a “hold.” None of the analysts recommend a “sell.” As of July 10, analysts’ consensus target price was 8.40 Canadian dollars, which represents a 12-month return potential of 44.1%.
Overall, 16 analysts follow OrganiGram. Among the analysts, 12 recommend a “buy,” while four recommend a “hold.” As of July 10, analysts’ consensus target price was 4.56 Canadian dollars, which represents a 12-month return potential of 119.1%.
Although OrganiGram provides strong growth prospects, I’m bullish on Aphria due to its strong balance sheet. Most of the marijuana companies have still been struggling to achieve profitability. However, Aphria reported a positive EBITDA in its past four quarters. OrganiGram earns approximately 24% of its revenue from wholesale, which can be volatile. So, I think that investors with a longer-term horizon should look to accumulate Aphria on dips.