While the intense COVID-19 containment measures that were instituted in the early days of the pandemic were initially iffy for North America's legal cannabis industry, conditions have improved in the past six months, especially after marijuana was declared an "essential item" in many areas. A reopening of retail outlets and the recent gains on the marijuana legalization front in the U.S. have combined to send shares of Aphria (APHA) (APHA) soaring. With solid sales figures and growth in international markets, this cannabis company is firing on all cylinders.
Indeed, in the past six months, Aphria stock has risen by more than 70%. But can the company maintain its momentum and make investors rich in years to come?
During its fiscal first quarter of 2021, which ended Aug. 31, Aphria's revenue increased by 16% year over year to 145.7 million Canadian dollars. The company is among the most efficient marijuana producers in Canada, with a cash product cost of CA$0.87 per gram of cannabis, compared with a selling price of between CA$4.15 and CA$7.38 per gram. A significant fraction of its sales growth came from increases in production. In the quarter, Aphria sold 20,882 kilograms of dried cannabis, compared with just 12,557 kilograms sold in fiscal Q4 2020.
Now, Aphria is close to breaking even. For the period, it booked a net loss of CA$5.1 million, or CA$0.02 per share. Year over year, the company increased its operating income by more than fivefold, to CA$20.7 million. It's also Canada's biggest legal pot producer, with a market share of 14%.
Exciting opportunities ahead
So far, Aphria has received the necessary certifications from the E.U. to make a big push into the German medical marijuana market. The company's subsidiary, CC Pharma, has a distribution system that can put its products into more than 13,000 drugstores in Germany, which will likely become the first nation in the E.U. that fully legalizes recreational cannabis (though a number of European countries have already decriminalized it).
However, Aphria is also ramping up its plans to expand into the U.S. On Nov. 4, it announced the $300 million acquisition of SweetWater Brewing at a multiple of 12.5 times its operating income, less non-cash expenses (EBITDA). SweetWater is the 10th largest independent brewing company in the U.S., producing more than 260,000 barrels of beer each year. More to the point, it currently has the best-selling hemp-flavored beer in the nation.
In 2019, SweetWater generated $67 million in revenue and had an EBITDA margin of 33.7%. The company sells its beverages across 27 states plus Washington, D.C., in over 29,000 retail locations and 10,000 restaurants and bars. Aphria and SweetWater expect to create massive revenue synergies by rolling out more cannabis-infused beverages into the $29.3 billion U.S. craft beer market, which is growing by more than 8% annually. The companies will likely generate up to CA$675 million in sales jointly this year.
The final verdict
For all its growth potential, Aphria remains attractively valued, trading at just 3.6 times sales and 1.2 times book value.
Due to the ample growth catalysts it has ahead of it, its substantial production volume, its well-managed business, and the fact that it's close to turning a profit, I expect Aphria to maintain its double-digit percentage revenue growth rate for the next few years. For marijuana investors looking for a long-term holding that could make them rich, Aphria is definitely a top pick.