The Canadian cannabis industry has been plagued with plenty of issues since its inception. Many pot companies have experienced massive declines in their market value over the past year. The slow rollout of retail stores in major Canadian provinces led to lower-than-expected demand, which drove inventory levels higher, resulting in…
massive writedowns and lower profit margins.
Health concerns related to vaping, the illegal market’s cannibalization of market share, and mounting operating losses have wiped out significant gains across the industry in the past year. However, there are two marijuana companies north of the border defying the trends of margin pressure and slowing revenue growth. Aphria (NYSE:APHA) and OrganiGram (NASDAQ:OGI) are profitable Canadian cannabis companies that are also listed on U.S. exchanges.
Let’s look at why these two pot players can be winning bets for long-term investors.
Aphria’s stock is 80% below record highs
Shares of Aphria are trading at $2.91 as of April 3. The stock is down 80% from its record high in January 2018, so it’s lost considerable value. However, while most cannabis companies are grappling with widening losses, Aphria reported a profit in two of the past three quarters.
In both instances, the bottom line was given a boost by fair-value adjustments. In the pot industry, plants cultivated for sale are biological assets. The fair-value adjustment is the difference between the revenue these plants are expected to generate and the cost incurred to harvest them, including the selling costs. Even given these adjustments, a positive net income figure is a rarity in the nascent marijuana industry.
In the past six months, Aphria reported a net income of 8.5 million Canadian dollars. The company’s revenue rose by a staggering 550% year over year to CA$120.6 million in the fiscal second quarter of 2020, which ended in November.
In the second quarter of 2020, Aprhia reported an adjusted EBITDA of CA$1.9 million, compared with an EBITDA loss of CA$9.5 million in the prior-year period.
Aphria is well poised to generate sales from the growing European medical marijuana market. Its subsidiary, German distribution company CC Pharma, is a huge player in the medical marijuana space. And Aphira’s distribution operations business is carried out by its wholly owned subsidiaries, including ABP, CC Pharma, and FL Group. This segment reported sales of CA$86.4 million and accounted for 72% of total revenue in Q2.
Another reason why Aphria might be a winning bet is the company’s strong balance sheet. While several pot stocks need to raise additional cash to keep operations going, Aphria’s cash balance is close to CA$500 million. Management is confident that it has enough liquidity to invest in capacity expansion and operational activities over the next 12 months. In the last six months, Aprhia’s liquid sources of cash fell by CA$73.3 million. Considering a similar burn rate, the company has enough reserves for the next three years.
However, it is likely that Aphria will continue to grow inorganically as well as invest in capital expenditure in the upcoming quarters that will drive the cash balance lower. Currently, its financial position is enviable compared to other loss-making peers.
Further, if the cannabis markets continue to underperform, Aphria could potentially acquire several companies at discounted prices, which could drive revenue higher in the coming years. In order to expand its international footprint, Aphria aims to establish operational hubs in regions where there are significant growth opportunities. It is heavily investing in such assets via acquisitions and will likely continue to do so. The company’s access to key international markets has already contributed directly to top-line growth.
OrganiGram’s stock is 74% below record highs
Shares of OrganiGram are trading at $1.62. The stock has fallen 79% from its record high in May 2019. While Aphria’s net income was driven by fair-value adjustments, OrganiGram generated an operating profit in the first quarter of fiscal 2020.
The company has…
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