Of all the cannabis stocks that underperformed in 2018, Aphria Inc (TSX:APHA)(NYSE:APHA) received the most criticism. Starting off the year at $20, it ended it at just under $8–a remarkable 66% slide. Part of the company’s problems ostensibly came from a now infamous report written by Quintessential Capital Management’s Gabriel Grego, which alleged that the company was defrauding shareholders. But in fact, the stock actually shed most of its value before that report was published.
So, the question facing investors is this:
Is Aphria Inc overvalued, as Grego and others have claimed, or has the stock been unjustly beaten down?
To answer that question, we need to look at the company’s earnings.
Earnings
Aphria is in a somewhat strange position when it comes to earnings. In Q1 fiscal 2019, the company reported $21 million in net income, on revenue of just $13 million. This discrepancy is accounted for by the company’s “gains on long term investments,” which is different from the “unrealized non-cash gains on marketable securities” often seen in earnings statements.
Aphria has actually invested a lot of its proceeds in a long term stock portfolio, which includes not just cannabis stocks, but also blue chip TSX stocks like Sun Life Financial and Royal Bank of Canada. Gains on these shares accounted for much of Aphria’s earnings in Q1, which creates a problem for the company, because in the period that its Q2 report will cover, many of these stocks fell in value. I’m therefore expecting Aphria’s earnings to disappoint in Q2.
Solid growth
Earnings concerns aside, Aphria is a growing enterprise as measured by revenue. In Q1 fiscal 2019, the company reported revenue of $13 million compared to $6 million in the same quarter a year before. That’s heady growth that should continue for the foreseeable future. Earnings are also growing quickly, but bear in mind that they are subject the financial risks outlined above.
Cheap by some metrics
This brings us to Aphria’s valuation. By some metrics, the stock is actually fairly cheap. The P/E ratio of 40 doesn’t appear low at first glance, but keep in mind the company is growing earnings at 40% year-over-year. Some analysts’ earnings estimates give the stock a forward P/E ratio of just 15, although I disagree with those estimates because Aphria’s earnings currently rest on shaky ground. Aphria’s price-to-sales ratio of 40, and its price-to-book ratio of 1.25, are among the lowest in the marijuana industry.
Assuming Aphria’s published figures are reliable, it appears to be one of the cheapest marijuana stocks on the TSX index. The million dollar question is whether those figures are reliable. Gabriel Grego’s report against Aphria cast serious doubt on whether some of the companies Aphria had acquired were really worth what they claimed. Should Grego’s claims prove to be accurate, then Aphria’s balance sheet may not be as strong as it appears to be.
At any rate, the company has already diluted equity significantly to make the acquisitions in question. While this stock looks cheap, at least by marijuana industry standards, I’d hold off on buying it for now.
