Aphria (NYSE:APHA) stock is basically on hold until the cannabis company can start to show serious profits. Right now Aphria stock has a market value of 1.76 billion CAD ($1.35 billion).
But lately, Aphria made losses of 7.9 million CAD in its most recent quarter. So its profitability is still in doubt. Moreover, the six months’ profitability was down significantly from the prior year.
In other words, Aphria is going in the wrong direction in terms of profitability.
Regulatory Burden Issues
The bottom line on the Canadian cannabis market is that Ontario, the nation’s most populated province, has only 24 retail outlets. Those outlets must service almost 14 million Ontario citizens who might potentially buy weed.
But there are only 37 million Canadians. So the math just does not add up. Estimates are that 75% of the cannabis sold in Canada is done in the black market.
The issue seems to be its regulatory burden. There simply aren’t enough stores approved to sell cannabis, especially in Ontario. (And the folks in the Eastern provinces are having a hard time simply getting out of the house this winter.)
If there aren’t enough places to sell your product you can’t simply can’t increase sales fast enough to get seriously profitable.
Cash Flow Problems Continue
Aphria has a reasonably good balance sheet. It has 497 million CAD in cash on its balance sheet. That will allow it to weather further financial losses.
For example, Aphria had operating cash flow losses of 71 million CAD for the six months ending November. But after capex spending of 66 million CAD, its free cash flow was negative 137 million CAD. That is a run-rate free cash flow of negative 284 million CAD on an annual basis.
That means its cash can last almost one more year and a half (i.e., 284 million CAD +(497 million CAD – 284 million CAD) divided by 497 million CAD = 1.43 years, or about 17 months).
To make matters worse, though, Aphria has 140 million CAD in bank and long-term debt, plus another 358 million CAD in convertible debentures. These are all interest-bearing liabilities.
So, the bottom line is that Aphria is going to have to get quickly profitable or else raise more dilutive equity or interest-bearing debt sometime within the next year or so.
If that happens, Aphria stock may not be able to withstand further losses or debt without dropping further.
Lack of Profitability Weighs on Aphria Stock
The APHA stock price, at $5.32, is down over 50% from its 52-week highs of $10.95. But in the last seven or eight months, Aphria stock has traded between $4 and $6 per share.
If the company has to weather further financial losses it may not be able to stay within this trading range. After all, its market value assumes profitability will come sooner rather than later.
For example, if the company can only make a profit of 17 million CAD in the next year or so, the market value should be nowhere near 1.7 billion CAD. It will likely go down by at least another 50% or more.
So watch the company’s earnings report for its fiscal Q3 ending February. This will likely come out sometime in late March or April. That will show whether Aphria is on track to recovering profitability.
If that happens then Aphria stock has a chance of rising or at least maintaining its present valuation.
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.