Marijuana stocks are a risky bunch, there’s no denying that. But at the same time, they also present a potentially very lucrative investing opportunity. And I would argue that Aphria (NYSE:APHA) is one of the best marijuana stocks out there.
Aphria produces and sells medical cannabis direct to registered patients across Canada. It was the first Canadian LP to exclusively utilize greenhouses, and is one of the lowest-cost producers in the Canadian industry. Aphria has current production capacity of 115,000 kg per year, and plans to expand to 255,000 kg/year during 2019, making it one of the world’s largest cannabis companies.
The company offers sativa, indica and hybrid medical marijuana products, as well as cannabis oils. According to Aphria, it is the first public-licensed medical cannabis producer to report positive cash flow from operations and the first to report positive earnings in consecutive quarters.
True, the company is not without its fair share of baggage (more on this later). However, I believe that’s partly why the stock remains so persistently undervalued. So in a bid to bring Aphria’s virtues to light, here are five reasons why this marijuana stock deserves a closer look right now:
Reasons to Buy Aphria Stock: All the Analysts Say So
Click to EnlargeLet’s start with this simple fact. All the analysts currently covering Aphria rate the stock a “buy” — no hold or sell ratings here. This includes top-rated analysts with a strong track record of successful stock picking. I am talking about GMP FirstEnergy’s Martin Landry, Clarus analyst Noel Atkinson, and PI Financial’s Jason Zandberg.
“We continue to believe that Aphria has developed one of the most automated and highly sophisticated cultivation facilities in the world at Aphria One, and we expect Aphria Diamond (140,000 kg/year) to have similar capabilities once it is licensed” says Atkinson. Aphria Diamond is essentially completed and awaiting Health Canada inspection to begin cultivation.
The screenshot above says everything about the Street’s “strong buy” take on APHA stock.
It Has Massive Upside Potential
Unlike some other cannabis stocks, Aphria doesn’t look overvalued — far from it. The company has an average analyst price target of $18. Given that the stock is currently trading at just $7, this figure suggests shares can surge by a whopping 157%. Bear in mind that shares exploded by 500% in the last three years, but then pulled back 59% in 2018. The fall came after the company was blasted by a short-seller report.
So far in 2019, the stock is up 12% in spite of a precipitous drop in April after earnings. And analysts see significant further upside ahead. “If management can guide the pending production ramp effectively, we believe there is the potential for a very substantial re-rating of the stock price from current levels” writes Clarus’ Noel Atkinson.
He has just ramped up his APHA price target from C$22.75 to $C24.75. The stock currently trades on the Toronto stock exchange at just $C9.32.
And as Atkinson points out, Aphria is much cheaper than other large-cap Canadian cannabis stocks. “Our tracking group of select larger Canadian LPs currently trades at … a median of 26.4x. In comparison, Aphria is currently trading at 8.9x our updated CY2020e EV/Adj. EBITDA” the analyst tells investors.
Canaccord Genuity’s Matt Bottomley has a similar message: “With a sizable share price reduction as of late, we continue to believe that Aphria remains one of the more attractive large cap LPs on its relative valuation, with a two-year fwd EV/EBITDA multiple of 12.1x (vs. its most comparable peers at 19.5x) and we would remain buyers of Aphria at current levels.” He is a Top 100 analyst according to TipRanks.
Explosive Revenue Growth Coming for APHA Stock
Aphria stock reported relatively soft Q3/FY19 financial results, particularly when it came to the crucial Canadian cannabis business unit. However, that’s what you get when you’re stuck with limited capacity and production bottlenecks.
But that’s all set to change. Just after quarter-end on March 4, Aphria announced that it had finally received Health Canada licensing for the crucial Part IV/V expansion (80,000 kg/year). This is a massive — and highly automated — expansion, that will bring total annual production capacity at Aphria One to 110,000 kg.
“We still expect a very large and rapid ramp in revenues starting this summer that should deliver significant economies of scale” writes Atkinson. He adds later on: “We believe Aphria is on the cusp of a hockey-stick revenue ramp.” Indeed, Aphria is targeting run-rate revenue from their Canadian cannabis unit of $500MM/year by the end of CY19 and $1 billion by the end of CY20.
As alluded to above, Aphria experienced a horrendous 2018. We are talking about a hostile takeover attempt from Green Growth (OTCMKTS:GGBXF) and short-seller allegations that insiders profited from acquiring international businesses at highly inflated prices. Luckily, a special board committee found that the allegations were not true. However, both the CEO and co-founder stepped down following the investigation.
This appeased short-seller Quintessential, who tweeted: “With a new management team the company has a chance to a brighter future and we are accordingly moving on to new projects.”
Now Irwin Simon is acting as CEO, and he brings with him a wealth of experience managing large-cap consumer companies. He is the founder and former CEO of multi-billion-dollar company Hain Celestial Group (NASDAQ:HAIN). And he seems to have the right idea about how to proceed:
“I want to make sure we get Canada right,” Simon told BNN Bloomberg recently. “I think there’s a lot of money to be made here in Canada … there’s a lot of growth in Canada. Making sure you get Canada right and learning from that will be very much the right model as you go in to the U.S.”
While Aphria may be divesting U.S. assets for now, the company is making important international progress elsewhere. It has just completed a roughly $425 million deal to acquire Nuuvera. This smaller medical marijuana company is currently expanding across Europe, Africa and the Middle East.
“We believe this deal provides Aphria with what could now be the largest international footprint in the industry, as well as increased technological proficiency in extraction, distillation and processing” states analyst Matt Bottomley. He believes Nuuvera has assets in place that could be meaningful contributors over the near to medium term.
“We note that the quantum of NUU shares reported to have been held by APH insiders (less than one million) is immaterial to Nuuvera’s capital structure (<1%). In our view, this does not have any bearing on the underlying fundamentals of the consolidated entity, which we believe remain strong and could now represent the most robust international strategy in the industry.”
Last but not least, let’s celebrate Aphria’s recent tender win. On April 5, Aphria received the maximum possible five licenses (of 13 issued) to undertake domestic cannabis cultivation in Germany. Out of the 79 companies that competed in the tender, only three received licenses.
Each four-year license grants annual cultivation capacity of 200 kg. “While the German domestic cultivation will not likely be a material contributor during our forecast period, it should boost Aphria’s standing in terms of achieving purchase orders from pharmacies in Germany for its export product” comments Atkinson. Get the free APHA Stock Research Report.
TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.