You might think that the choice between Aphria (APHA) and Aurora Cannabis (ACB -3.55%) is an easy one. Aphria underperformed Aurora last year and has done the same in 2019 so far -- and by a wide margin.
But there's a lot more to consider than just past stock performance in choosing between Aphria and Aurora. Which of these two Canadian marijuana stocks is the better pick now? Here's how Aphria and Aurora stack up against each other.
The case for Aphria
It's important to understand the reasons behind Aphria's relative underperformance. The company was hit by short-seller allegations in late 2018 that it drastically overpaid for LATAM Holdings in a transaction that benefited key Aphria insiders. Aphria also posted disappointing fiscal Q3 results in April.
But a review by a special committee made up of independent members of Aphria's board of directors found that the price Aphria paid for LATAM Holdings wasn't out of the ballpark of similar transactions made by its peers. Also, a change in the company's growing methods and initial packaging challenges with adult-use recreational cannabis hurt Aphria's Q3 sales. The good news is that these are all temporary issues.
Aphria appears to be in great shape from a production capacity standpoint. With its Aphria One facility now licensed, the company claims an annualized production run rate of 115,000 kilograms. Aphria is on track to boost its annual capacity to 255,000 kilograms.
It also is positioned to succeed in the Canadian adult-use market over the long run. Aphria secured supply agreements with all of Canada's provinces plus the Yukon Territory. The company teamed up with Southern Glazer's, the largest wine and spirits distributor in North America, to distribute its adult-use cannabis products throughout Canada.
Aphria has operations in 10 countries outside of Canada with medical cannabis markets. The most important of these is Germany, where the company was one of three to be awarded a license to cultivate medical cannabis inside the country.
Perhaps the strongest argument for Aphria right now is that its valuation is more attractive than those of many of its peers. Aphria's market cap is well below that of most Canadian marijuana producers with similar production capacity. This could make the company more appealing to major players in industries that could be disrupted by cannabis that are looking for a cannabis partner.
The case for Aurora Cannabis
Pretty much everything seems to be going right for Aurora Cannabis these days. Unlike Aphria, Aurora beat revenue expectations in its latest quarter. The company's future looks even brighter for several reasons.
Aurora continues to generate strong sales growth in the Canadian adult-use recreational cannabis market. But international medical cannabis sales are growing even faster. Aurora remains the industry leader in terms of total international sales. It was also, along with Aphria, one of the three companies to be awarded a license to cultivate medical cannabis in Germany.
The company also leads the industry in funded production capacity. While Aurora's annualized production run rate currently stands at more than 150,000 kilograms, it expects to increase its capacity to more than 630,000 kilograms. Another big plus is that Aurora's annual oil extraction capacity now stands at nearly 16,000 kilograms. This is especially important as the market for cannabis derivative products opens up in Canada later this year.
This tremendous capacity is also giving Aurora economies of scale that help it lower its costs. The company thinks that it will be able to get the production cost per gram at its Sky class facilities well below 1 Canadian dollar. Aurora expects to generate positive EBITDA in its current quarter by controlling costs while its sales soar.
Aurora doesn't have a partner from outside the cannabis industry like some of its peers do. However, that could change in the near future. The company brought billionaire investor Nelson Peltz on board in March as a strategic advisor to, among other things, line up potential partners in key industries that could be disrupted by cannabis. Peltz's connections in the consumer packaged goods (CPG) industry could be especially helpful.
Analysts view Aurora quite favorably because of all these factors. Cowen's Vivien Azer particularly likes the company's significant production capacity, with demand exceeding supply in Canada and in international markets.
My view is that both of these stocks could perform well over the long run as the global cannabis market expands. Which is the better pick? I think the decision comes down to a couple of factors.
Aurora's current production capacity is roughly 30% greater than Aphria's. But Aurora's market cap is more than five times the size of Aphria's market cap. Aphria is also positioned well in the most important international markets where Aurora operates. My take is that while Aurora is arguably the stronger company, Aphria has more room to run and gets the nod as the better stock right now.