During the coronavirus pandemic, many U.S. locales deemed cannabis an essential item, and the resultant surge in sales brought revenue pouring in for several marijuana companies. But the same can't be said about the Canadian market. While that country also declared cannabis essential, changes in consumer sentiment, supply challenges, and consumers pivoting toward the illicit market were among the reasons revenue growth slowed north of the border.
That said, revenue does seem to be rising for two Canadian pot companies: Canopy Growth (CGC 15.03%) and Aphria (APHA). And while shares of these two companies have fallen by 20% and 12.2%, respectively, so far this year, both are actually doing a little better than the benchmark Horizons Marijuana Life Sciences ETF's decline of 25%.
Profitability, leadership teams, and balance-sheet strength are just some of the factors investors should consider when choosing between these two marijuana stocks.
The case for Canopy Growth
Canopy -- the owner of cannabis brands Tweed and Tokyo Smoke -- became a favorite among investors when it landed a partnership deal with beverage giant Constellation Brands (STZ 0.74%) in 2017 to expand the base of its cannabidiol (CBD) products in the U.S.
But last year brought a decline in revenue, and the company failed to earn a profit. This has been taking a toll on the stock price, and while things are improving somewhat thanks to a slight surge in sales, Canopy Growth has yet to record positive earnings before income, tax, depreciation, and amortization (EBITDA). That said, in its first quarter of fiscal 2021, ended June 30, revenue did grow by 22% annually to $110 million Canadian dollars, owing to higher medical cannabis sales in Canada and Germany.
Sequential growth from the prior quarter, however, was a mere 2%, and revenue from the Canadian recreational market sank 11% to CA$44.2 million, challenged by the pandemic-era retail operating environment.
First-quarter results failed to impress investors largely because they included another EBITDA loss. When CEO David Klein took the reins in January after serving as Constellation Brands' CFO, investors hoped he would help to tighten Canopy's cost structure, as higher expenses were blamed for the lack of profit. A positive EBITDA would show that the company was capably managing operating expenses.
The new CEO did announce some cost-cutting measures in April, including exiting operations in South Africa and Lesotho; closing some facilities in Canada, Colombia, and New York; and eliminating 85 full-time positions. What's worrisome is that despite these changes, selling, general, and administrative (SG&A) expenses were down by just CA$10.3 million in Q1 (to CA$135.4 million).
However, thanks to Constellation's decision to exercise its warrants in May and increase its stake in the company, Canopy's cash position remains strong. It has CA$2 billion in cash, cash equivalents, and marketable securities on the books as of the end of Q1. Ever since its initial investment of CA$245 million in 2017, Constellation has been consistently increasing its stake in Canopy, a sign of the faith it has in the company's growth.
Image source: Getty Images.
The case for Aphria
A good C-suite leadership team is crucial in a growing industry. Canopy Growth acknowledged this when it gave the reins to Klein from former CEO Bruce Linton, and it's a similar story at Aurora Cannabis (ACB 18.15%), whose former CEO, Terry Booth, stepped down in February. The news didn't go over well with investors; shares have lost 63% year to date.
And then there's Aphria, where the consistent performance can be attributed to its excellent leadership team under CEO Irwin Simon.
Simon started with Aphria as the independent chair of its board of directors in late 2018 and took over the role of interim CEO in March 2019. Before that, Simon founded packaged-foods company Hain Celestial and ran it for 25 years.
Simon's main objective since joining Aphria has been to focus on the company's core market in Canada. Its asset-light approach has worked well -- unlike some peers, it hasn't burned through cash with aggressive acquisitions. It has reported five quarters of consistent positive EBITDA, including the most recent fourth quarter, reported July 29. The company also managed to move from the No. 2 to the No. 1 position in Canada in terms of adult-use gross revenue, with 26.7% sequential growth.
For the fourth quarter ended May 31, adjusted EBITDA of CA$8.6 million was up 49% from CA$5.7 million in the year-ago quarter. Higher adult-use revenue and an increase in gross profits of 32%, to CA$47.3 million, drove the EBITDA increase.
Aphria's strength lies in its adult-use segment, which made up 86% of net revenue in Q4, but it also benefits from a medical cannabis business that's widely spread over Canada, Europe, Africa, South America, and Oceania. Its Germany-based subsidiary, CC Pharma, saw a 12% sequential increase in medical cannabis sales in Q4.
Net revenue came in at $152 million, up 18% from the year-ago quarter and 5% from the third quarter of 2020. CA$65.4 million of that came from cannabis products (13% from medical, 86.5% from recreational, and 0.5% from wholesale), and CA$99.1 million came from distribution revenue (CA$97 million from CC Pharma and CA$2 million from other distribution companies). The company paid CA$12.3 million in excise taxes.
SG&A expenses were up 94% to CA$116.6 million; that number included $64 million of non-cash impairment charges related to changes the company made in its international operations. According to management, its businesses in Jamaica, Lesotho, and Colombia were particularly affected by the COVID-19 pandemic, costing more in capital expenditures. This resulted in a net loss of $98.8 million in the quarter, but I wouldn't fret -- these are one-time charges. They affected the recent share-price performance, no doubt, but they don't dent the company's long-term potential.
So far in August, Canopy, Aurora, and Aphria's shares have declined by 6.8%, 8.2%, and 4%, respectively, while the industry benchmark Horizons Marijuana Life Sciences ETF's has fallen by 7%.
CEOs who run a tight ship create companies that do remarkably well -- which is evident in Aphria's profit numbers and rising revenue. It also boasts CA$497.2 million in cash and cash equivalents, which it plans to put toward both domestic and international growth.
Which should you choose?
Both Canopy and Aphria are good marijuana stocks, no doubt, with tremendous growth potential. But given a choice between these two, I would go with Aphria. The main differentiator here is Canopy's lack of profitability, which could continue to weigh in on its stock price.
Moreover, Aphria has enjoyed steady success under Simon, and there's no guarantee of the same under Canopy's new CEO -- Klein's expertise in the consumer packaged goods and beverages industry may or may not be a large benefit for Canopy, and while his tighter expense structure may work in the long run, that could take awhile. Meanwhile, losses are mounting for now.
For its part, Aphria has remained consistently profitable by focusing on its core operations in Canada. The company has a strong balance sheet to not only survive the crisis, but thrive afterward -- making it the better cannabis pick for 2020.
