Canadian cannabis sales are continuing to balloon amidst the coronavirus pandemic. The latest data from Statistics Canada show that in June, retail sales topped 201 million Canadian dollars and were up 8% from May's total sales. And during the second quarter, which ended June 30, revenue from the nationwide legal market finally finished ahead of the black market: That's the first time the licit market has come out on top since the Canadian government legalized marijuana in October 2018.
The Canadian pot market is showing more promise than ever, and two popular cannabis companies stand to benefit. Despite their historic difficulties in generating cash, paying off debts, and avoiding massive writedowns, Aphria (APHA) and Aurora Cannabis (ACB 1.63%) could be poised to claim shares of the rapidly expanding marketplace. Today, I'll look at which stock is the better-positioned pick.
Will Aurora disappoint investors again this month?
Aurora will release its results for the fourth quarter ended June 30 on Sept. 22 -- and it will be a pivotal moment for the company.
Aurora has struggled in previous periods to grow its revenues and stay out of the red. Convincing investors to buy up this struggling stock, which is down more than 70% this year, will require the company to post stronger numbers ahead of a new fiscal year.
Net revenue in its most recent quarter, ended March 30, totaled CA$75.5 million. While that was up from second-quarter revenue of CA$56 million, it was barely above first-quarter sales of CA$75.2 million. A year ago, in the fourth quarter, Aurora recorded net revenue of CA$98.9 million. Investors may recall this period as one of embarrassment. Aurora was left red-faced after missing its own forecast and sales projections, which it had released only a month earlier.
Unfortunately, all signs point to this being another underwhelming quarter. In a Sept. 8 update, Aurora announced that it expects Q4 net revenue to come in between CA$70 million and CA$72 -- well below Q3 numbers. And if that wasn't bad enough, it will record an impairment charge of up to CA$1.8 billion on goodwill. In addition, the company has decided to postpone its goal of reaching positive adjusted earnings before income taxes depreciation and amortization (EBITDA) to the second quarter of fiscal year 2021. That's a sharp change of course from June, when the Alberta-based company reported that it was on track for positive adjusted-EBITDA in Q1 2021.
Given all this negativity and the challenges ahead for Aurora in terms of both sales growth and profitability, it may not be surprising that Michael Singer is "delighted to now be transitioning the CEO responsibilities" to the company's new CEO, Miguel Martin. Martin has been Aurora's chief commercial officer since July, when he transferred over from Reliva, a company that makes hemp-based cannabidiol (CBD) products with a strong presence in the U.S. Reliva was acquired by Aurora in May.
Unless Aurora is purposely setting the bar low for the upcoming quarter, it looks like it'll be another disappointing period for the Canadian pot producer.
Aphria is coming off a tough quarter of its own
Ontario-based Aphria is normally more consistent than Aurora, and has been less of a disappointment to investors overall. In three of the last five quarters, Aphria has finished in the black, achieving positive earnings and profitability. Aurora has turned a profit just once in its past five quarters, which only happened because external income gave its bottom line a boost.
When Aphria released its fourth-quarter results on July 29 for the period ending in May, it reported a loss of CA$98.8 million. Impairment charges of CA$64 million weighed down its results, as did non-operating losses of CA$23 million. Despite a disappointing bottom line, Aphria still achieved positive adjusted-EBITDA for the fifth consecutive period, totaling CA$8.6 million in Q4.
One of the strengths of Aphria's business is its diversified distribution structure. In its most recent fiscal year, CA$369.2 million of its CA$543.3 million in net revenue came from distribution revenue. Most can be attributed to CC Pharma, a German importer and distributor it acquired in 2019. The acquisition of CC Pharma allowed Aphria to stand its products on a pre-established platform across over 13,000 pharmacies in Germany. The deal will also help the company penetrate the broader European market for cannabis in the future.
Aphria is the better buy, by a mile
Although Aphria comes with its own question marks, there isn't much of competition between it and Aurora. Aphria is indeed coming off a bad quarter, but poor performances just aren't as common for the company as they are for Aurora. Investors are more likely to get burned by Aurora, which has fallen short of its estimates in the past and is already pushing back projections for adjusted-EBITDA and profitability. The pot company has a lot to prove. That's why it's no surprise that year to date, Aphria's stock has dwarfed Aurora's and it's not far behind the Horizons Marijuana Life Sciences Index ETF (HMLSF 0.51%).
Whether you're a long-term investor or just risk-averse, Aphria is the better overall buy with stronger financials, a better track record, and worldwide hopes for its future.