Aurora Cannabis (NASDAQ:ACB) and Aphria (NASDAQ:APHA) were reportedly in talks to merge not long ago. But those discussions fell apart, leaving Aurora and Aphria to continue going their separate ways.
Neither of those ways has been much to get excited about so far this year. Aphria's shares are still down a little year to date after mounting a solid comeback from the major market meltdown in February and March. Aurora has also rebounded somewhat, but its shares are still down nearly 60% year to date.
Which of these two Canadian marijuana stocks is the better pick for investors now? Here's the good, the bad, and the ugly for Aurora and Aphria.
The scoop on Aurora Cannabis
Let's start off by addressing why Aurora stock continues to languish. The most important reason is that the company is losing a lot of money. That issue leads to other problems, namely the prospects of more dilution-causing stock offerings and a huge debt to service. It also doesn't help matters that Aurora doesn't have a permanent (or at least semi-permanent) CEO in place nearly six months after founder and former CEO Terry Booth stepped down.
We could discuss Aurora's problems at length. But the cannabis producer does have some positives, too. For example, Aurora's Q3 sales announced in May were a lot better than expected. That could be a sign that the company is turning things around. In fact, Aurora tracked in the right direction in Q3 on all of the key metrics the management team uses to measure the company's performance.
Aurora has definitely made significant progress in reducing its expenses. It has cut 25% of support staff and 30% of production staff. The company is shutting down five smaller facilities. These efforts could put the company on a path to deliver positive cash flow and adjusted EBITDA in the near future.
While Aurora has been busy rightsizing its operations, the potential for the global cannabis market remains high. Canada's pot sales should increase as the Cannabis 2.0 cannabis derivatives market picks up momentum. Medical cannabis markets in Europe continue to expand.
Aurora at long last has even entered the U.S. In May, the company acquired Reliva, one of the top-selling cannabidiol (CBD) brands in the U.S.
Aphria's pros and cons
We only have to look at Aphria's balance sheet to spot one key problem for the company. Its long-term debt topped 130.6 million in Canadian dollars at the end of February. The company also had nearly CA$335 million in convertible debentures. Combined, that's a pretty large dark cloud hovering over Aphria, which generated net income of only CA$5.7 million in its latest quarter.
That profit, by the way, isn't quite as good as it might seem. Aphria recorded a fair value adjustment on growth of biological assets in Q3 of nearly CA$40.3 million. Without that adjustment, the company would have posted a loss for the quarter.
But there are several things to like about Aphria. The company has generated four consecutive quarters of positive adjusted EBITDA, an accomplishment most of its peers can't claim. It has also strengthened its balance sheet by buying back around CA$127.5 million of senior convertible notes in exchange for a combination of stock and cash.
Aphria's medical and recreational marijuana sales in Canada continue to grow. Like Aurora, the company should benefit as the country's Cannabis 2.0 market grows. Aphria CEO Irwin Simon stated in the fiscal 2020 Q3 conference call in April that the company has a "77% share across all brands on vapes in Ontario." He also said that Aphria had three of the top five brands in Ontario in March. Those are solid achievements considering that Ontario is Canada's largest cannabis market.
In addition, Aphria's acquisition of CC Pharma last year gives it a strong position in the German medical cannabis market. The pharmaceutical distributor continues to generate exceptional sales growth and provides Aphria a steady source of cash flow.
Better marijuana stock
My view is that it's not much of a contest between these two marijuana stocks. I think that Aphria is the hands-down winner.
Aphria already consistently delivers positive adjusted EBITDA while that's still an aspirational goal for Aurora. Aphria has a strong CEO with an impressive track record in the consumer goods industry. Aurora is still looking for a new CEO. Despite its debt, Aphria also has a stronger balance sheet than Aurora does.
Like most marijuana stocks, Aphria could be too risky for some investors. But I suspect that aggressive investors will find Aphria more attractive than Aurora.