After Thursday’s close, cannabis company Aphria (NYSE:APHA) reported an actual net profit for its recently-completed quarter, catapulting Aphria stock higher to the tune of 30% on Friday. The numbers were posted even before the echoes of industry-wide writedown concerns for other legal marijuana companies had stopped ringing.
APHA is something of an industry outlier. Most of the company’s rivals have been, and will likely continue to, bleed money as a result of making huge acquisition bets that consume time and money beyond a deal’s price tag. One notable exception is a largely-unknown OrganiGram Holdings (NASDAQ:OGI), which has been normally turning a profit for a year.
Nevertheless, Aphria’s quarter offers up a glimpse of what could be — and arguably should be — the future for most of the most recognizable names in the business. These other outfits just need to start the engines on all the assets they have been gathering, but are not yet utilizing.
Of course, there’s a big footnote that has to be added to any exploration of these per-share results for APHA stock.
Aphria Quarterly Results
It was a breath of fresh air … almost.
For the quarter ending in May, Canada’s Aphria booked record-breaking net revenue of C$128.6 million, up nearly 1000% on a year-over-year basis, turning C$15.8 million of that into net income. Granted, a year ago, recreational marijuana had not yet been legalized in Canada, and the company made a key, accretive acquisition in the meantime. The top line was still up 75% from the previous quarter’s tally, however — boosted by slightly-improved prices — and a profit is still a profit.
This particular profit, though, somewhat taints the now-seemingly unstoppable Aphria stock.
Of that C$128.6 million in revenue Aphria produced, C$99.2 million of it was driven by the January acquisition of German medical marijuana distributor CC Pharma, and categorized as distribution revenue. Recreational marijuana sales, although up an impressive 158% year-over-year, still only rolled in at C$18.5 million. It’s possible that without the addition of CC Pharma, Aphria would have still been in the red for its recently ended quarter.
The adjusted EBITDA from distribution operations was actually a negative 3.9 million, while the company’s adjusted total EBITDA was only C$209,000.
If nothing else, credit must be given for making a savvy acquisition that’s already bearing fruit. Other cannabis outfits continue to pay a steep price (literally and figuratively) for deal-making that’s yet to add any revenue to the mix.
Writedown Risk Remains for APHA Stock
Bloomberg Intelligence analyst Kenneth Shea cautioned investors in early July that major, profit-sapping writedowns could be taken in the near future. Without offering specifics, he was seemingly talking about Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB) and Aphria. Those companies (though not just those companies), show large levels of so-called ‘goodwill’ on their balance sheets related to recent acquisitions.
If those deals don’t start to pay off soon, accounting standards necessitate these organizations fiscally indicate as much.
It’s not an idle warning or a mere possibility either. In its quarter ending in February, Aphria took a C$50 million impairment charge versus its C$73.6 million worth of revenue to reflect lackluster performance from deals made with Central American cannabis organizations.
As of the end of May, Aphria indicated nearly C$670 million worth of goodwill still on its balance sheet.
Though less concerning for Aphria stock, in June BMO Capital Markets cannabis analysts Tamy Chen and Peter Sklar expressed concern about growing inventory levels on several cannabis companies’ balance sheets. The analysts noted, “What remains unclear is why the planting of recently licensed grow rooms has not been meaningfully offset by the conversion of prior months’ unfinished inventory into finished products for sale to provincial distributors given the apparent supply shortage in retail channels,” adding that “If some of the dated ‘unfinished inventory’ is ultimately determined to not be extraction-grade, then there would be a need for inventory writedowns.”
Aphria currently has C$91.5 million worth of inventory on-hand, though the potential use and marketability of that inventory has not been detailed.
Looking Ahead for Aphria Stock
It’s possible Aphria could grow its way past worries that its recreational marijuana business is barely breaking even, and that more writedowns are in the works. The company is forecasting revenues of between C$650 million and C$700 million for the fiscal year that just began, which should yield an EBITDA of between $88 and $95 million.
With the introduction of edibles in Canada beginning in December, Aphria wouldn’t have to capture much of that market to reach its revenue goal. Its EBITDA outlook may not be quite as easily attained.
Whatever’s in the cards, there’s no escaping the fact that after Friday’s surge, Aphria stock is priced uncomfortably high for newcomers.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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