Aphria Inc. (TSX:APHA), one of the Canadian marijuana stocks, could surprise the Street with its second-quarter financial results
SmallCapPower | January 10, 2019: Aphria Inc.’s (TSX:APHA) (NYSE:APHA), one of the Canadian cannabis stocks, upcoming financial results will likely be the most anticipated in Company history. After all, Aphria has been dealing with recent accusations from Hindenburg Research and Quintessential Capital Management, which claimed that it overpaid for LATAM Holdings Inc, and that the assets are “largely worthless.” Then, to add to the confusion, a smaller U.S. cannabis retailer Green Growth Brands Ltd. announced a hostile takeover proposal that valued Aphria at almost $2.8 billion – and that was just in December.
When Aphria does report its second-quarter 2019 results before the market opens on Friday, January 11, 2019, shareholders could be in for an upside surprise.
First, expectations have been beaten down severely following the Hindenburg report, as shares of Aphria have sank more than 58% to its current price of $8.92 since closing at $21.70 on September 10, 2018. As well, given the current uncertainly surrounding the Company and management’s desire to fend off a hostile takeover, a strong quarter should do much to silence critics and a potential stock-price hike would make its unwanted suitor’s quest much more difficult.
A look at Aphria’s results from its previous quarter (Q1 2019) could offer some insight into what the Company will report on Friday. Revenue during Aphria’s first quarter increased 10% quarter over quarter to $13.2 million and 117% from the same period last year, which was slightly better than the $13.1 million average analyst consensus (Capital IQ). For Q2, analysts are expecting sales of $37.4 million, which could be light, considering the financial results will include nearly six weeks of legal recreational sales in Canada. Aphria has signed supply agreements with all Canadian provinces for 30,000 kilograms annually in the first year of legal sales.
That being said, it’s the Company’s Q2 bottom line that could really catch the market by surprise. Analyst forecasts call for a small GAAP profit, excluding extraordinary items, of $0.15 million, or a penny per share loss. During its first-quarter of 2019, Aphria posted negative adjusted EBITDA following 11 successive quarters of positive adjusted operating earnings. However, the Company attributed this loss to costs increases due to its Nuuvera acquisition, labour shortages, and regulatory issues related to recreational legalization. Its Q1 gross margin, meanwhile, slipped from 79% to 64%, which Aphria blamed on the same operational issues due to having to quickly scale up to try to meet demand post recreational legalization.
An expected surge in sales post October 17 should also have a big impact on the Company’s operating earnings for the second quarter. Given Aphria’s history of being one of the industry’s lowest-cost cannabis producers, the ingredients are there for a big earnings beat.
The real bottom line for Aphria, though, is that Q2 is shaping up to be a make or break quarter for the Company, a sentiment likely not lost on management.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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