Canada's third largest marijuana cultivator, Aphria (APHA), shocked Wall Street last Friday by posting a huge sales boost during its fiscal fourth quarter. In fact, the company generated a modest profit of CA$15.8 million, or CA$0.05 per share, for the three-month period, thanks to its newly acquired German medical cannabis unit CC Pharma. That's a big improvement over the company's staggering quarterly loss of CA$108.2 million, or $0.43 per share, in the prior quarter.
The big deal is that Aphria's shares have been sliding ever since the company's disappointing fiscal third-quarter results hit the wires last April. The company's hefty write-offs, managerial turnover, and mounting losses all acted as an anchor on the pot titan's shares over the past few months. As a result, Wall Street clearly wasn't expecting Aphria to get its house in order so quickly.
With Aphria firmly on the comeback trail under the watchful eye of interim CEO Irwin Simon, there's arguably a lot to like about this beaten-down stock. Here are three reasons Aphria might, in fact, be the best pot stock to buy right now.
1. Aphria has an attractive valuation
Compared to fellow top-tier cultivators Aurora Cannabis (ACB 0.95%) and Canopy Growth (CGC -2.43%), Aphria's shares are a downright bargain. Despite Aphria's sizable move during Friday's session, its stock is still trading at only around 2.3 times calendar year 2020's projected sales. Aurora, on the other hand, is trading at an astronomical 12-times 2020's estimated revenue haul, and Canopy's stock isn't doing much better from a valuation standpoint, at 11.1 times next year's projected sales.
The long and short of it is that Aphria's Latin American asset scandal and subsequent managerial turnover seriously damaged its long-term value proposition in the eyes of many investors. With a new management team in place and a rapidly growing footprint in Germany through CC Pharma, though, Aphria might be poised to finally claw its way back to respectability. This undervalued pot stock, in turn, could perhaps double or even triple in value within the next few months, depending on how the marijuana space performs as a whole over this period.
2. International expansion is moving quickly
With the Canadian adult-use recreational marijuana market headed for a serious supply glut next year, the top pot cultivators and distributors in the country will need to start to ramp up their export volumes in a big way to soak up all this weed. After all, marijuana does have a limited shelf life, especially dried flowers.
To meet this key challenge facing the industry, Aphria has built one of the widest commercial footprints outside Canada. For example, the company was recently granted the maximum number of lots during the German tender process, five in total, and permitted to grow all three strains of medical cannabis approved by the German Federal Institute for Drugs and Medical Devices. During the most recent quarter, Aphria launched a CBD-based nutraceutical product line designed specifically for the German market as well.
Aphria has also started to gain traction from a commercial standpoint in both Latin America and the Caribbean. Keeping with this theme, the company's 49%-owned subsidiary Marigold Projects Jamaica Limited received a retail Herb House license from Jamaica's Cannabis Licensing Authority earlier this year. Aphria and Marigold are thus set to open their first store, Sensi Medical Cannabis House, in Jamaica later this month.
Like all the top Canadian cultivators, Aphria still has a lot of work to do to flesh out its international operations, but the company has accomplished a fair amount in a relatively short time. That's an encouraging sign that Aphria will indeed be able to successfully evolve into a multinational corporation.
3. Strong balance sheet
The biggest limiting factor for nearly all pot companies right now is access to non-dilutive sources of capital. Although Aphria has yet to ink a major partnering deal to solve this problem, the company did exit the most recent quarter with a whopping CA$571 million in cash, cash equivalents, and liquid marketable securities.
So while Aphria may not have the monstrous cash hoard of Canopy Growth or Cronos Group, the company does have a sizable bankroll to fund its ongoing expansion efforts. It wouldn't be surprising to see Aphria put a good chunk of this capital to use soon by striking a deal with either a U.S.-based CBD company like Charlotte's Web Holdings or a big-name dispensary like MedMen Enterprises. Aphria's management, in fact, hinted at this very possibility during yesterday's conference call.
Is Aphria the best of the best?
Labeling Aphria as the absolute "best" pot stock might be bit of a stretch. After all, there are a smattering of other cannabis companies with more compelling long-term outlooks, as well as easier paths toward sustained profitability. Having said that, Aphria did make a strong case yesterday that its stock is at least the best buy among Canada's elite producers.
Aphria's new management team has clearly stabilized the company, sharpened its corporate focus, and brought about a new level of professionalism to boot. That's not to say other top-tier producers like Aurora and Canopy don't have impressive operations as well, but their stocks are also trading at far richer premiums than Aphria.
All told, Aphria's stock should easily outperform both Aurora and Canopy's respective equities from this point forward, thanks to its rock-bottom valuation and the company's drastically improving commercial performance.