The 2021 merger between two strong cannabis companies, Tilray (TLRY -0.58%) and Aphria, is turning out to be fruitful. Since the deal was completed, Tilray has reported impressive quarterly results.
Its recent third quarter (ended Feb. 28) report had some brights spots for investors. Revenue keeps growing, which is driving earnings before interest, tax, depreciation, and amortization (EBITDA) profitability. It also made a splash by forming a strategic alliance with fellow Canadian pot grower Hexo. Let's take a look at this standout pot stock and consider if the time is right to buy it.
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A stronger company since joining hands with Aphria
Aphria was already a robust, profitable pot company. Under new CEO Irwin Simon, Tilray is on the path to reaching new heights in the Canadian cannabis space and the merger has extended its horizons globally. Cultivation facilities in Portugal and Germany will help strengthen its position in the European markets.
A merger this big will take a while to show its full potential. But Tilray has already realized cost synergies of $76 million to date. Management expects to earn an $80 million synergy target (ahead of schedule) by May 31 and an additional $20 million in fiscal 2023.
Cost synergies are the reductions in cost that a company achieves from a merger. These efficiencies include high-class production facilities, competitive innovative products, growth strategies, the scale of operations, and more to generate higher sales. These efficiency targets do not include revenue synergies that will be generated.
Tilray's consistent performance is impressive
Tilray's third quarter marked the 12th consecutive quarter of positive adjusted EBITDA. This is impressive considering how its peers Aurora Cannabis, Canopy Growth, and Hexo are struggling to grow revenue and be EBITDA positive. A net revenue jump of 23% year over year to $152 million contributed to this performance.
Tilray's acquisition of craft beer maker SweetWater Brewing and hemp-based foods maker Manitoba Harvest contributed a significant amount to total revenue.
Management credited the following factors for adding to the total revenue surge:
- 32% growth in cannabis revenue (medical and recreational) to $55 million from the year-ago period.
- Net beverage alcohol revenue of $19.5 million from SweetWater, a growth of 63%.
- Wellness segment revenue (includes hemp foods and cannabidiol products) of $14.6 million from Manitoba Harvest.
The Canadian medical cannabis business boomed while recreational sales dipped a little in the third quarter. But according to management, Tilray still maintained the No. 1 leadership position in Canada with 10.2% market share.
On the downside, Tilray reported free cash flow of negative $35.6 million in the third quarter, a trend that continued from the prior two quarters. But management assured investors that the company is still "working toward sustaining positive free cash flow generation and view achieving it consistently as a priority for this business."
Even though distribution revenue dipped 11% year over year to $63 million, most of which is generated by German subsidiary CC Pharma, the slowdown was the result of currency translation. Distribution revenue contributed to 41% of total revenue.
Is Tilray the only Canadian pot stock to invest in now?
In fact, this is the right time to buy Tilray stock, which is trading more than 50% below its 52-week high. Unlike Aurora Cannabis, Tilray has more chances of establishing a strong position in the U.S. market (if and when federal legalization happens). Simon stated SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest are EBITDA profitable and will help the company build a stronger business in the U.S. The company is also on a path to achieving $4 billion in revenue by fiscal 2024, while peers are struggling to even grow revenue.
Tilray also entered into a strategic alliance with Hexo to pay off its $193 million in convertible debt, earning the right to own a substantial stake in Hexo at a later date. Tilray will also benefit with $18 million annually for "advisory services" and 5% annual interest on said debt to be paid by Hexo. Both companies also aim to save up to $80 million in cost synergies annually between them, within two years of completion of the deal.
This is not exactly a merger, but we can expect this deal to form a joint venture of two strong cannabis companies from which Tilray will ultimately benefit in the form of less competition and better marijuana prices.
Investors who can wait for Tilray to reap the benefits of the Aphria merger and the strategic deal with Hexo can buy the stock on the dip now to hold it for the long haul. Analysts see an average upside of 163% for this pot stock for the next 12 months. This may be the only Canadian pot stock to invest in right now.
