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2 Reasons Why Aphria Could Be a Buy

By Prosper Junior Bakiny - Nov 1, 2019 at 10:25AM

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Aphria’s latest financial results were a breath of fresh air in an otherwise struggling industry.

It's no secret the marijuana industry has endured a barrage of headwinds over the past few months. Various issues in the Canadian market -- including a slow rollout of physical stores and supply shortages -- have negatively impacted the financial performance of many of the top cannabis companies. To make matters worse, the entire industry has been dragged down by company-specific scandals, most notably the debacle surrounding CannTrust Holdings

In case you've been living under a rock, the Ontario-based company was caught illegally growing weed in several secret rooms. As a result, CannTrust's license was suspended by Health Canada.

Given this backdrop, investors were not exactly holding their breath as Aphria ( APHA ) prepared to release its Q1 2020 financial results, but these results -- which came out Oct. 15 -- managed to grab everyone's attention. Aphria's earnings were impressive, and the company's shares climbed by as much as 24% after their release, although things have slightly cooled down since then. 

Fresh off this major win, Aphria could be one of the better prospects in the cannabis industry. Here are two reasons why.

A dropper filled with cannabis oil adding drops to a glass vial half-filled with the oil, with marijuana leaves blurred in the background.

IMAGE SOURCE: GETTY IMAGES.

1. Attractive valuation

Consistent profitability is a goal that has thus far eluded most major Canadian cannabis companies. Aphria seems to be on the right track in attaining that goal, however.

During its latest reported quarter, the company managed to record a net profit for the second time in a row. Aphria's net income for the quarter was $16.44 million, a slight increase from the $15.76 million it recorded during the previous quarter. 

Without red ink on its bottom like -- unlike most of its peers -- Aphria's valuation actually looks reasonably attractive. The company currently trades at just 18 times past earnings. Comparing Aphria's valuation to that of some of its competitors is instructive. For instance, Tilray, which has yet to record a net profit as a publicly traded company, currently trades at 26 times past sales.

2. Strong international operations 

Aphria's strategy includes substantial investments in international markets. In particular, the company built a strong presence in Germany, which is often touted as the largest cannabis market outside North America.

In May, the pot grower completed the German tender process and received five cultivation licenses, along with approval to grow all three strains of medical cannabis permitted by the relevant authorities. Aphria also launched cannabidiol (CBD) products for the medical and cosmetic segments in Germany. 

Aphria completed the acquisition of CC Pharma -- a Germany-based distributor of medical cannabis -- in January, a transaction for which it paid a little over $27 million in cash, with another $25.9 million it will have to pay in incentives based on performance. This acquisition is already having a major impact on Aphria's top line. During the company's latest reported quarter, revenue from CC Pharma accounted for about 73% of Aphria's net revenue.

Lastly, Aphria boasts a strong presence in South America, thanks to its acquisition of LATAM Holdings, a deal that caused problems for the company when Aphria was accused of grossly overpaying for this deal in an attempt by some of Aphria's executives to divert millions of dollars to themselves. While the company denied these allegations, the drama surrounding this transaction eventually led to the resignation of its CEO.

With this whole mess in the rearview mirror, Aphria can look forward to profiting from what is likely to be a lucrative market. Uruguay recently legalized recreational marijuana, and Mexico might soon follow suit. With assets in countries such as Brazil, Argentina, and Columbia, the company is slowly looking to establish a foothold in the region.

Should you buy? 

The cannabis industry will likely continue on its volatile trajectory. And while industry growth is expected in the future, investing in cannabis stocks isn't for everyone. But for those looking to profit from one of the fastest-growing markets in the world, it might be worth considering purchasing shares of Aphria. The company's comparatively attractive valuation and strong international operations may yield tangible dividends somewhere down the road. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Aphria Stock Quote
Aphria
APHA
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
CNTTQ
$0.01 (0.00%) $0.00
Tilray Stock Quote
Tilray
TLRY

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