Aphria (NYSE:APHA) is down 11% year-to-date but that situation is likely to reverse. That is because Aphria is one of the only cannabis stocks that is profitable. Its profitability will increase next year, leading Aphria stock higher.
Aphria produced a profit of $15.8 million Canadian dollars for its fourth quarter ended May 31. Next fiscal year ending May 2020, Aphria should higher revenue between CA$650 and CA$700 million. More important, adjusted EBITDA will reach between CA$88 million and CA$98 million.
Aphria is able to convert its EBITDA in net income at a high rate. For example, adjusted EBITDA of CA$5.5 million in its Q4 converted into a net income of $15.76 million, a 35% conversion rate.
Therefore, applying this conversion rate to Aphria’s expected EBITDA in 2020 shows it will be profitable. Taking the mid-point for adjusted EBITDA, CA$675 million, and multiplying it to the 35% conversion rate, yields CA$236 million.
Aphria stock has 254 million fully diluted shares outstanding. That means its expected earnings per share will be CA$0.93 next year.
Valuation Looks Too Cheap
At CA$7.14 per share, Aphria trades for just 7.7 times expected earnings. It should be trading at multiples of this price. Aphria is also cheap on the basis of enterprise value to EBITDA.
For example, Aphria’s market value is CA$1.81 billion. After subtracting its net cash of CA$504 million after all long-term debt, Aphria stock has an enterprise value of just CA$1.3 billion. So that means APHA stock has an EV/EBITDA ratio of just 1.93 times.
That ratio is incredibly cheap. The stock should be trading at three to four times that valuation, or at least six to seven times adjusted EBITDA. That would also put Aphria’s P/E ratio of 23 to 30 times. This seems more reasonable for such a high growth stock.
At these ratios, Aphria should be trading at CA$21, at three times the present price, the stock has been close to these prices before. For example, APHA stock hit $13.94 in September 2018 and $14.75 in December 2017.
This is based on the analysis above that the EV/EBITDA and P/E ratios are way too cheap. Moreover, the fact that net cash represents 27.8% of the stock market value could potentially make Aphria a potential takeover target.
Growth Upside
Aphria’s growth is based on increasing production and reasonable costs. For example, in Q4 ending May revenue increased 75% from the prior quarter and 9.7 times the prior year. Moreover, Aphria sold 5.574 kilograms of cannabis, 211% higher than the prior quarter.
This growth is expected to continue through fiscal 2020 ending May. Most of Aphria’s revenue and profit come from its “distribution” revenue. This is where the company purchases and then resells cannabis inventory bought from other producers. In effect, it acts as a retail trading operation by buying inventory from wholesalers and smaller growers.
Starting in 2020 its distribution revenue and profits will be a lower percentage, slightly more than half of the total revenue. This means that Aphria’s own cannabis operations will be growing faster than the revenue and profit it makes from its distribution/wholesale buying operation.
Bottom Line on Aphria Stock
Given the upside potential for Aphria, investors should now be looking to take a position. This is one of the only cannabis stocks that is actually making a profit.
It also has a very healthy balance sheet. In fact, cash and securities, after deducting all debt (CA$504 million), represent 27.8% of its stock market value. At only 2x expected EBITDA and 7x expected earnings, APHA stock is too cheap.
Aphria stock should rise exponentially over the next year. It expects to report higher revenue and positive profits. Aphria will announce its first-quarter earnings ending August 2019 on Oct 15. Look to take a position before then.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
