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CIBC Sees Choppier Waters Ahead for Aphria (APHA) Stock

With less than a week to go before Q4 earnings come out, eyes are beginning to turn to Canadian medical marijuana stock Aphria (APHA) -- in a bad way.

On Thursday for example, CIBC analyst John Zamparo warned that Street estimates for Aphria's fourth quarter look "aggressive," raising the possibility of an earnings miss come August 1st. Although the analyst still insists Aphria stock deserves to be valued at "a premium vs. [other] Canadian producers" of cannabis, that premium came down in a hurry yesterday, with Zamparo cutting his price target from C$12 per share to just C$6.50 per share. Adding fuel to the fire, Zamparo downgraded the stock from "neutral" to "underperform," (To watch Zamparo's track record, click here)

But why does Zamparo expect Aphria to underperform in the first place?

The answer comes in three parts:

First and foremost, Aphria currently has no CEO to lead it. While the analyst may believe Aphria is a superior cannabis play, it's going to be hard for the company to capitalize on its advantages, which include a "relatively developed footprint, nationwide distribution and some branding strength") and chart a good course with no one standing at the helm.

Second is the risk of another writedown happening in the near future. As you may recall, Aphria recently had to take a $50 million "non-cash impairment charge" related to its LATAM assets in Columbia, Argentina, Jamaica, and Brazil. Now, Zamparo is warning that the company may also need to write down some of the book value of its January 2018 acquisition of Nuuvera, which cost the company $500 million -- including $400 million worth of hard-to-value "goodwill." If it turns out that Aphria overpaid for this acquisition, as much as 80% of the assets acquired could be at risk of a writedown, making a fiscal year 2019 that's already expected to be deeply unprofitable, even worse.

And speaking of profits, Zamparo's third risk -- along with a risk to Aphria's sales. "We've significantly reduced our estimates for sales and EBITDA in both F20 and F21," says the analyst, with Aphria now expected to report full year sales of only C$225.5 million for this year, followed by $546.2 million in sales next year. Granted, that's still a big jump in sales (if it happens). But it's also 14% fewer sales than what the analyst previously called for.

Worse, earnings before interest, taxes, depreciation, and amortization ("EBITDA" -- there probably won't be any net income) are now expected to run negative to the tune of C$44 million in 2019, and amount to only positive C$4.3 million in 2020. Previously, Zamparo had been looking for C$39 million in 2020 EBITDA, so this is a very sizeable 89% reduction in expected profit.

No doubt this will come as a disappointment to Aphria investors -- but perhaps not only to Aphria investors. Fact is, Zamparo is seeing "slower ... growth than previously contemplated" all across the marijuana industry. And if that proves to be the case, well, investors in Cronos (CRON), in Aurora Cannabis (ACB), and in Canopy Growth (CGC) -- don't say you weren't warned.

However, not all analysts on the street voice Zamparo's bearish forecast for the Canadian cannabis maker, as TipRanks analytics showcase APHA as a Buy. Based on 15 analysts polled in the last 12 months, 11 rate Aphria stock a Buy, 2 suggest Hold, and 2 recommend Sell. The 12-month average price target stands at C$11.52, marking about 50% upside from where the stock is currently trading. (See APHA's price targets and analyst ratings on TipRanks)