Aphria Inc (TSX:APH) released its quarterly results on Friday, which continued to show strong growth for the company as sales more than doubled from a year ago. Aphria also saw its profits increase by more than 40%. However, let’s take a closer look at how the company did this past quarter. Below are my three takeaways from the company’s earnings release.
Sales growth par for the course, but expenses continue to soar
While it’s good to see that Aphria sales were up over 117%, the bigger issue I see is that its operating expenses rose at an even faster rate: 270%. One of the things that I mentioned to watch for was whether or not the company would be able to produce a positive operating income, and that wasn’t the case as Aphria recorded a negative $10.3 million loss compared to a gain of $1.4 million this time last year.
The company is involved in expanding in many parts of the world, and so it shouldn’t come as much of a surprise that general and administrative expenses would rise, but the rate at which we’re seeing costs increase by is a bit concerning and calls into question whether or not the company will be able to produce an operating profit anytime soon. While investors may not be concerned with that today, sooner or later it’s going to start being an issue.
The role of non-operating items is too significant
When you see a company’s income statement having more line items in the non-operating section than you do in the other parts of the statement, which should be a concern. Investment-related gains and other income were able to turn an operating profit loss of $10.3 million into a pre-tax profit of over $25 million, adding over $35 million to the company’s bottom line.
For the sake of appearances, it looks great that Aphria produced such a strong profit. However, as an investor, I’d want to see that the company is able to produce a profit from its operations, not its investments. After all, poor-performing investments could swing the results in the other direction very quickly. This creates the potential for very volatile earnings reports and that could mean an even bigger roller coaster ride for investors.
No formal announcement, but a big rumour swirling
One of the items I was also looking for in Aphria’s earnings release was whether the company would comment on any possible deals, as it’s been sitting quiet amid a flurry of activity in the industry. And while Aphria didn’t make a formal announcement, earlier this week it was reported by The Globe & Mail that the company behind Marlboro was rumoured to be interested in Aphria and that it would be looking to acquire a minority stake in the company.
If it materializes, it will be the first big tobacco company to make a deal with a cannabis company and would be yet another industry that has now entered the space. We’ve already seen some of its rivals get involved in some big deals, and so it’s no surprise that we’d see news involving Aphria as well.