It has been exceptionally costly to try to go bottom-fishing on marijuana stocks in 2019. Every time the sector seems to finally reach its lowest point, something comes along to knock prices down even farther. So it’s daunting trying to call a turnaround after many failed attempts.
For Aphria (NYSE:APHA) shareholders, however, there is fresh cause for optimism. The stock has rebounded 20% off its 52-week low recently. On top of that, unlike so many other marijuana names, Aphria hasn’t had a horrible 2019.
In fact, Aphria bottomed in the $4 range last December, and it’s still at $4.77 now. You can make the argument that it has technical support in this area, and it’s certainly outperformed most of its cannabis peers in 2019.
Adversity Has Made Aphria Stronger
Very few marijuana companies are firing on all cylinders at this point. The sector is in a horrid bear market, there’s no avoiding that fact. However, Aphria has a more compelling story than most other cannabis names.
That’s because Aphria faced great difficulties at the end of 2018. Short sellers issued scathing reports about Aphria’s business, and some of their attacks connected. The company had some shortcomings related to its mergers and acquisitions process and related-party transaction disclosures. Aphria’s founders left, and there were major changes regarding the company’s strategic direction.
Aphria faced adversity while the rest of the sector was still flying high. It had to make an honest assessment of its prospects and prepare for lean times well before its rivals. This has given Aphria an advantage, as the company has already been in crisis response mode all year and thus has been quicker to adapt as the Canadian marijuana market collapsed this fall.
Canada’s Marijuana Oversupply
New CEO Irwin Simon has not wilted while faced with all these problems. Instead, he’s helped Aphria come back strong. Aphria now has one of the best balance sheets in the marijuana industry. Operationally, it actually pulled off improved pricing last quarter, in contrast with almost everyone else in the industry.
Additionally, the company has one of the cheapest cost structures out there. This has allowed it to achieve a rare feat: profitability. While earnings aren’t quite there, Aphria is producing a positive number on an EBITDA basis. When you combine that with its healthy cash position, this gives the company staying power while weaker rivals have to curtail production and lay off employees.
Over time, the marijuana industry will have to slow down production so that demand can catch up with supply. In this process, the companies with the best financial positions should prevail. Right now, that looks like Aphria. And the company took another big step recently in cementing that status.
Reasonably Attractive Financing
Last week, the company announced that it had obtained funding for its Diamond production facility. A major Canadian bank is loaning Aphria 80 million CAD with an annual interest rate of approximately 5.5%.
This is good news for several reasons. For one, Aphria raised funding at a subsidiary level, which appears to leave the company exposed to less risk overall if anything goes wrong with Diamond. Second, the interest rate looks great. So many marijuana companies are struggling to find funding at any cost. Weaker firms are having to issue new equity at rock-bottom prices, crushing their share prices even farther.
Finally, the ability to get financing at an attractive rate is a great sign given dismal industry conditions. The fact that a major Canadian bank will fund the Diamond facility at this point validates that it is still a good project despite the current anemic returns on capital across the marijuana industry. Aphria is already getting Diamond ready for production, and it should start bringing in serious cash flow in 2020.
My Takeaway
I have to give CEO Irwin Simon a lot of credit. He arrived at Aphria when it was a company in crisis. It was under fire from short sellers, and faced critical credibility questions. Companies like CannTrust (NYSE:CTST) have struggled to respond in the face of that sort of adversity. Meanwhile, formerly hot marijuana stocks like Canopy Growth (NYSE:CGC) have collapsed. But Aphria overcame its critics and in doing so, it became one of the industry’s most resilient stocks in 2019.
On a recent cannabis industry podcast, Simon discussed his decision to take the reins at Aphria during its crisis:
I’m somebody who likes a challenge. And this was one, I picked up a big challenge, but I got to tell you, I fell in love with the industry. I also fell in love with the people that were at Aphria, I felt their passion. I felt bad for them, what they had been through. And I also came back and saw we had incredible assets.
It remains to be seen if Simon can fully pull off the transformation. But with a strong balance sheet, continued access to bank credit and some of the best-in-class production assets, Aphria is a most reasonable bet on cannabis going forward.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
