Late last week, Wall Street investment firm Jefferies initiated coverage on embattled marijuana stock Aphria (NYSE:APHA) with a buy rating and a price target of 15 Canadian dollars ($11.10), implying more than 70% upside from where Aphria had closed on its previous day of trading.
Owen Bennett, the head analyst at Jefferies covering the cannabis industry, noted that Aphria scored third highest on an internal strategic scorecard, behind only Canopy Growth and Aurora Cannabis, which happen to be the respective No.’s 2 and 1 in terms of peak production potential in Canada.
More specifically, Bennett pointed out in his note that “[Aphria’s] valuation is the cheapest across our space, with allegations around inflated assets/insider deals weighing.” It’s for this reason that Bennett and his firm foresee significant upside to Aphria.
However, Yours Truly would contend that it’s not the cheapest in the marijuana space. Despite Aphria being valued at 22 times next year’s earnings per share and only 3.1 times next year’s projected revenue, the following three marijuana stocks look to be even cheaper…
With the understanding that value can be measured in a variety of ways, including by forward price-to-earnings ratio and/or by future price-to-sales ratio, ancillary cannabis stock KushCo Holdings (NASDAQOTH:KSHB) is remarkably inexpensive on the basis of future price to sales. According to Wall Street, KushCo projects for $243 million in sales in 2020, which works out to a multiple of only 1.66 times its current market cap.
If you’re wondering why KushCo is receiving no love from Wall Street, the answer is twofold. First, as a provider of packaging and branding solutions for the global cannabis industry, it’s received some blame for Canada’s packaging shortage, which is one of a handful of reasons Canada has experienced a notable supply shortage of marijuana in dispensaries.
Secondly, KushCo’s gross margin has come in below its target of 30% for multiple quarters now, with part of the reason being that the company has absorbed tariff costs associated with vape products imported from China. Recently, however, management noted its intent to pass these costs onto consumers, which shouldn’t be a problem considering the high demand for derivative consumption options beyond smoking dried flower. As a result, KushCo’s margins should improve significantly in the quarters that lie ahead.
Meanwhile, KushCo should benefit from growing demand for compliant packaging and branding solutions, increased use of vape products, and improved demand for hydrocarbon gases and solvents, which are used in the respective production of oils and concentrates. KushCo is a supplier of both hydrocarbon gases and solvents.
Although recurring profitability may still be 12 to 18 months out, with the company reinvesting in the infrastructure needed to thrive as an ancillary player, pretty much no marijuana stock is cheaper than KushCo on the basis of price to sales…
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