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This Analyst Sticks with His Buy Rating on Aphria (APHA) Stock, But Trims Price Target

support@smarteranalyst.com (Ben Mahaney)

Left and right, Seaport Global is rolling back prices -- or at least price targets -- on Canadian cannabis stocks. (It's kind of like a sale at Wal-Mart, but in a bad way). On Wednesday we looked at analyst Brett Hundley's price target cut on Hexo stock. Today, we'll be taking a look at his "update" on Aphria (APHA).

In contrast to the Hexo report, which Hundley rushed out ahead of that company's earnings, this update has no particular catalyst behind it -- just a general feeling that the analyst has been too optimistic about marijuana companies' prospects in general, and needs to his numbers to account for that fact.

Fact is, the bulk of Hundley's update on Aphria focuses on good news. Aphria raised $350 million in convertible debt in April, for example, filling Aphria's coffers with enough cash "to carry it through FY2020 and into FY2021," in the analyst's opinion. And by the time 2021 rolls around, says the analyst, Aphria should be solidly free cash flow-positive, and able to generate its own cash, rather than having to borrow it from bankers.

The company has also struck a deal with privately-held cannabis "vape" device maker PAX Labs to supply "pods" filled with heat-able and inhalable cannabis oil, to be used in PAX's vaporizer devices when the market for such value-added marijuana products opens up in Canada "later this year."

Nonetheless, Hundley says he's cutting his forecasts for both Aphria's sales and earnings before interest, taxes, depreciation, and amortization (EBITDA) in both fiscal 2020 and 2021. Sales estimates for FY2020 inch down 3% to C$520 million, and ratchet back 4% to C$851 million in FY2021. EBITDA estimates for 2020 go from a C$39 million profit to a $3 million loss. And in 2021, EBITDA estimates fall 15% to $148 million.

Regardless, Hundley maintains a "buy" rating on the stock, albeit at a lower $13 price target ($16 previously). (To watch Hundley's track record, click here)

The big picture

Well, for one thing, even if sales and EBITDA estimates are falling, Hundley still sees great things in store for Aphria. If all goes as planned, Aphria should nearly triple marijuana sales in 2020 over 2019, then grow them another 64% in 2021. By that point, Aphria should be selling enough weed that its operations will become profitable. Whether they'll be profitable enough to justify Aphria's $1.8 billion market cap remains an open question. Then again, though, you could say that about almost any cannabis stock these days.

Rather than focus on valuation, therefore, investors might be best advised to focus more on Hundley's market commentary, using it as a guidepost for "what happens next." In that regard, the analyst notes that "Aphria believes that vapes and concentrates will represent close to 30% of the entire Canadian adult-use market by 2021 ... Vape products will likely follow in legal US state footsteps and become a meaningful proportion of the new Canadian market."

In other words, Hundley is of the opinion that investors need to peer through the marijuana smoke haze, and start focusing instead on which companies will dominate the market for marijuana vapor, which would include devices ("vaporizers" or "e-cigarettes"), the cannabis oil they heat for inhalation, and the pods that oil comes in.

This, in the analyst's view, is where the market is heading -- and probably where you will want to be invested going forward.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

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