The world of cannabis has changed significantly over the past year as some of the sector's top companies have lost much of their appeal. Both Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB), the cannabis sector's two largest stocks by market cap, have both seen their share prices plummet alongside the industry as a whole. Whereas large-cap pot stocks seemed certain to succeed a year ago, investors are looking at these companies in a new light following recent disappointing quarterly results.

However, Wall Street analysts remain optimistic about one-large cap pot stock. While Aphria (NYSE:APHA) started the year on a sour note, there are quite a few good reasons this stock has now become one of the best in the industry for its size. Let's take a look at a few of them.

Scientist in a hemp field examining a plant.

IMAGE SOURCE: GETTY IMAGES.

A record of profitability

In a market where most pot stocks, especially large-cap cannabis companies, continue disappointing investors in terms of profitability, Aphria has already posted two impressive quarters of positive earnings. In its most recent quarter, Aphria reported total sales of 126 million Canadian dollars with a profit of CA$15.8 million. Its peer Canopy Growth brought in revenue of CA$76.6 million but posted a loss of CA$374.6 million in its recent fiscal Q2 2020 results. Then, Aurora had net revenues of CA$75.2 million and a net loss of CA$39.7 million. Compared to these figures, Aphria's profitability is a breath of fresh air.

Company Market Value Quarterly Sales Net Profits Cost per Gram
Aphria $1.56 billion $126 million $15.8 million $1.43/g
Aurora Cannabis $3.76 billion $75.2 million ($39.7 million) $0.85/g
Canopy Growth $8.53 billion $76.6 million

($374.6 million)

$2.12/g (approx.)

DATA SOURCE: QUARTERLY FINANCIAL RESULTS. ALL FIGURES ARE IN CANADIAN DOLLARS.

While Aphria's figures have eclipsed those of its larger rivals, the truth is that most of this CA$126 million figure wasn't due to cannabis sales but to its recently acquired EU pharmaceutical distribution business, CC Pharma. Around CA$95.3 million of Aphria's income came from this company, with only CA$35 million directly coming from cannabis sales. Canadian cannabis companies technically fall under the designation of "agricultural companies," which allows them to make fair-value adjustments that can drastically impact their reported income with a bit of accounting magic.

For the quarter, Aphria benefited from a net CA$17.9 million bonus from these fair-value adjustments on its cannabis assets. While Aphria isn't the only company that does this, without these adjustments, Aphria wouldn't have been profitable this quarter after all. However, even if the CA$17.9 million bonus is factored out, Aphria's losses would have been significantly smaller than Canopy's and Aurora's, only coming in at a loss of CA$2.1 million.

Comparing cultivation costs

Aphria has seen its cultivation costs increase, with its cash cost to produce dried cannabis rising to CA$1.43 per gram, compared to the previous quarter's CA$1.35/g. It's worrying that production costs have gone up this quarter, as the more cannabis a company produces, the lower these costs should be as operations become more efficient. However, a one-time increase for a single quarter isn't something to be overly concerned about unless it becomes a trend. Aurora, however, has more than surpassed Aphria as a low-cost producer, reporting a cash cost per gram of just CA$0.85, a 25% reduction from the previous quarter's CA$1.14.

Although Canopy Growth doesn't report its cost per gram in the same way that Aphria and Aurora Cannabis do, historically, the company has been a higher-cost producer then its competitors. Canopy reported inventory production costs of CA$86.3 million, and with a quarterly production output of 40,570 kg, this breaks down to an approximate $2.12 cost per gram produced.

A calculator and a pencil on top of a corporate financial statement.

IMAGE SOURCE: GETTY IMAGES.

Why Aphria is so cheap

However, what truly makes Aphria such a compelling investment is its extraordinarily cheap valuation. Aphria trades at a 5.3 price-to-sales (P/S) ratio, whereas its peers all trade at higher P/S ratios.

Metric Aphria Aurora Cannabis Canopy Growth Tilray HEXO Cronos Group
Market value CA$1.56 billion CA$3.76 billion CA$8.53 billion $2.14 billion CA$732 million CA$3.23 billion
Price-to-sales ratio 6.4 13.0 24.0 15.1 12.8 79.9

DATA SOURCE: YCHARTS.

This now begs this question: What's making Aphria's valuation so cheap? The answer is that the company still has somewhat of a damaged reputation from a previous scandal. In December 2018, short-sellers accused Aphira of financial mismanagement stemming from its acquisition of Latin and Central American assets, saying they were not just worthless but were actually attempts to funnel shareholder money into the pockets of corporate insiders. While the scandal died down after the resignation of longtime CEO Vic Neufeld, the company's image remains tarnished -- which has kept its valuation low.

What about the Aleafia situation?

Earlier in October, Aphria was hit with bad news when one of its valued long-term customers, Aleafia, ended a five-year supply agreement that was originally signed last September and entered effect in May. Aleafia claimed that Aphria had failed to live up it's side of the bargain by not providing sufficient amounts of cannabis. Aphria responded officially by stating it had every intention of living up to the deal, and that should Aleafia chose to sue Aphria for damages, it would vigorously defend itself. At the moment, however, it appears that Aleafia hasn't pressed any legal action, instead just choosing to divorce itself from Aphria quietly. The deal involved 175,000 kilograms over a five-year period that would have been worth more than CA$1.05 billion at the company's current wholesale prices.

Investors should keep in mind that Aleafia inherited its Aphria supply agreement when it bought out Emblem in December.Inheriting this five-year agreement can be a pain for Aleafia, especially if it will end up purchasing hundreds of millions of dollars of pot from Aphria that it might not even need anymore. This is especially true given Emblem's own production, which is expected to hit 129,500 kg once all its facilities are fully operational.

While there's no official confirmation that Aleafia wanted to end the supply agreement due to it not needing the extra cannabis anymore, Aleafia's management did state that "The company does not believe the termination of the supply agreement will materially and adversely affect the company's business, operations or results." If losing Aphria's cannabis will have no effect on Aleafia's business, then that would suggest that the Aphria supply deal was indeed redundant. If so, investors shouldn't look at this entire affair as a mark against Aphria.

Taking into account Aphria's current margin of 49.8%, the loss of the Aleafia deal would cost Aphria CA$522 million over five years, or CA$105 million per year. While it's a big hit, Aphria's management expects revenues for 2020 to reach more than CA$1 billion, a drastic increase from the CA$126 million seen in 2019. While investors should be wary of aggressive growth estimates, even if Aphria reports only half that figure, it would be quite an achievement for the company. Taking this into account, I'd argue that the loss of the Aleafia supply agreement isn't as big a deal in the grand scheme of things.

Is Aphria really the best large-cap pot stock?

While other companies can beat Aphria in terms of revenue, production costs, and cultivation capacity, no other large-cap pot stocks come close to its profitability. However, what pushes Aphria up from a noticeable stock to a compelling buy is its cheap valuation.

Although a year ago, few would have expected pot companies could become value stocks so quickly, that's exactly what appears to have happened with Aphria. Investors aren't going to find a better deal in the large-cap cannabis sector, and long-term investors should consider adding shares of Aphria to their portfolios.