Should You Buy Aphria Inc. (TSX:APHA) Stock Ahead of Earnings?

Aphria Inc. (TSX:APHA)(NYSE:APHA) is set to release its third-quarter earnings on April 15. Shareholders may be in for a treat if the company can accomplish another earnings beat.

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Aphria (TSX:APHA)(NYSE:APHA) is a heavyweight cannabis producer based in Ontario. Shares of Aphria fell 1.04% on April 8. The stock has climbed 69% in 2019 so far.

Aphria stock surged above the $14 mark in early February on the back of significant internal shifts in the company and a broad move up for the cannabis sector. Back in early February, I’d warned prospective buyers that they would be paying a premium for Aphria at that time. Shares quickly retreated in mid-February and have since been on a flat trajectory.

The cannabis sector showed signs of overvaluation in early February, and many top stocks are still pricey today. Aphria is a unique case. Shares are trading at the middle of its 52-week range. The stock plunged to 52-week lows of $4.76 in early December 2018 after the release of a damaging short report.

Aphria is set to release its fiscal 2019 third-quarter results before the market opens on April 15. A glance at its RSI, which stood at 54 as of close on April 8, tells us that Aphria stock sits in neutral territory as far as pricing is concerned right now. There is good reason to believe the stock has room to run as we await its third-quarter report. Let’s examine why.

The company reported 63% net revenue growth in Q2 fiscal 2019 and posted an adjusted profit of $10.2 million. Aphria stated that its annualized harvest is expected to increase to 255,000 kilograms by the end of this calendar year. This puts it in elite company among the top cannabis producers in Canada.

New Aphria chairman Irwin Simon aims to achieve margins of at least 40% by the end of this fiscal year. As with other producers, this increase in revenue relies on a ramp up of Aphria’s production. As of late March, Aphria was only running at about 18% capacity. Aphria’s board of directors unanimously rejected a hostile takeover bid from Green Growth, which slapped on a value per share of $7.40. This represents a discount of approximately 50%.

Unlike other top producers, like Canopy Growth and Cronos Group, Aphria has not yet secured a large partnership with a third party. Simon has said that the company feels no pressure to do so and is focused more on getting its “plan in place.” The company has made more strides in its international push since its previous earnings release.

In early April, Aphria was awarded provisional approval in Germany for a cannabis cultivation licence. Pending the competition of the Standstill, which is subject to a mandatory 10-day period for public contracts, Aphria could be well positioned to entrench itself as a supplier in Germany. The most populous European country has seen booming demand since the Cannabis as Medicines Act in March 2017.

Investors need to be cautious in this hot market, but at the same time it does not hurt to be aggressive in the near term. Aphria impressed in its Q2 fiscal 2019 report, and if it can do it again in Q3, its stock is poised for a nice run-up later this month.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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