The Motley Fool

Should You Buy Aphria Inc. Ahead of Earnings?

Aphria Inc. (TSX:APH) is expected to release its first-quarter earnings in early October, and it could be a good opportunity to buy the stock before the results are released to take advantage of a possibly strong result. Despite a loss in Q4, the company’s stock increased 14% on its last earnings day. Aphria saw its sales more than double from the previous year, and a similar result in Q1 could give the stock price a big boost on earnings day.

I’ll highlight a few ways Aphria stands out from other cannabis companies and why it might be a good buy before earnings day comes along.

The company has been profitable in four of the last five quarters

What has set Aphria apart from other cannabis producers is that the company has actually been able to post profits. Other than its most recent quarter, where Aphria posted a loss as a result of an investment, the company has recorded earnings totaling over $8 million in the previous four quarters for an average profit margin of 46%.

The company has been able to achieve profits in large part due to its strong gross margins; in the past five quarters, gross margins have averaged an incredible 77%. To put this into perspective, Canopy Growth Corp. (TSX:WEED) has not even had a positive gross margin in any of its previous five quarters. Aurora Cannabis Inc. (TSX:ACB) has managed to achieve positive gross margins in its last three quarters while averaging margins of 49%, but the two previous quarters were in the red.

Ultimately, investors are going to start looking at more than just revenue growth, and while Aphria will certainly see growth continue, its distinct advantage right now is its focus on profitability rather than growth at all costs.

Focus on cost comes from the top

One of the big advantages Aphria has is its CEO, Vic Neufeld. He previously led Jamieson Wellness as CEO for over 21 years as the company built and expanded the premiere vitamin brand. Leadership is a big part of growing a company, and Aphria has a good head on its shoulders that will help it achieve success.

Neufeld has been an advocate of driving down costs for the company, and one of the ways Aphria has accomplished that is by growing all of its cannabis inside a greenhouse, which allows the company the to use less lights, no air conditioning, and, as a result, Aphria is able to avoid many of the costs that indoor growers incur. In Q4, the company’s all-in sustaining costs per gram were $1.67, down from $2.23 — a 25% improvement for an already low-cost producer.

What this means for investors

The cannabis industry continues to grow and, undoubtedly, sales will rise for Aphria. While competitors like Canopy might focus on swallowing as much competition as possible, growing by acquisition is costly and can create many redundancies along the way. If Aphria can continue to build sales while making its operations more efficient, it will present a much more stable investment in the cannabis industry.

The stock could get a boost from either a jump in sales or further cost efficiencies, and so it might be a good idea to buy the share before that happens.

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Fool contributor David Jagielski has no position in any stocks mentioned. 

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