The Motley Fool

Is Aphria a Good Buy Under $10?

Image source: Getty Images.

Aphria (TSX:APHA)(NYSE:APHA) is one of the biggest names in the Canadian pot sector, but the company has also had the worst publicity out of all of its peers. Indeed, the marijuana grower has fallen on tough times recently, and it is taking some time for Aphria to shake off the various negative storylines associated with it.

However, many investors see Aphria as a bargain, in part because its share price has been dragged down due to bad publicity. Could Aphria’s current struggles actually be an opportunity for investors? Let’s see whether the Ontario-based firm actually has more upside than it seems at first glance.

Focusing on the medical cannabis sector

Aphria is committed to the medical cannabis market perhaps more than any of its main competitors who aren’t Aurora Cannabis. The recreational marijuana market obviously presents huge opportunities. It typically has far more customers than its medical counterpart. However, medical products tend to carry higher margins, and medical customers are more likely to open up their wallets.

Thus, focusing primarily on the medical market is not necessarily a losing strategy. During the company latest reported quarter, about 60% of its sales came from its medical segment while the remaining 40% came from recreational sales. Speaking of Aphria’s most recent financial results…

Aphria’s earnings disappoint

On April 15, Aphria released its third-quarter earnings report. Though revenues soared by 617% year over year, the company’s sales of recreational and medical cannabis decreased by 35.45% and 2%, respectively compared to the previous quarter — a much better measuring stick given how much has changed in the industry in the past year.

Further, Aphria’s expenses rose, which caused margins to fall. The company gross profit margin was down to 18% compared to 47% in the previous quarter. Aphria’s earnings were also negatively affected by a $50 million impairment charge. Allegations that the company had paid too much for various acquisitions it had made in Latin America were the basis for this non-cash item. Overall, Aphria’s results were less than impressive, and the company’s share price has decreased by the double digits since they were released.

Can Aphria turn things around?

There is some good news going forward for Aphria, however. First, the company is set to substantially increase its production capacity in the coming months. Aphria’s production capacity is currently estimated to peak at around 250,000 kilograms per year. Second, Aphria’s international operations are already playing an important role in the company’s financial results. Two of Aphria’s subsidiaries abroad contributed significantly to its distribution revenue. Aphria was also recently granted a license to cultivate cannabis in Germany, the largest market outside of North America.

Should you buy?

Aphria is currently lagging far behind Aurora in its medical segment, and behind several more in terms of sales in its recreational segment. The company has been plagued by various things, including the short-seller allegations, which severely impacted its profitability during the last quarter. Aphria has yet to acquire a big-name partner, unlike some of its competitors.

Despite other things going its way — an increasing production capacity, strong international operations, and the fact that it is currently very cheap ($9.95 at of writing) — Aphria may not be the best option for cannabis investors. Although those who see a huge potential opportunity and decide to jump in can’t be blamed for doing so.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Prosper Bakiny owns shares of Aurora Cannabis.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.