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Why Aphria (TSX:APHA) Is a Buy Ahead of Its Q4 Earnings

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Aphria (TSX:APHA)(NASDAQ:APHA) is one of the top-performing stocks in the cannabis space. It is up over 158% from its March lows. The renewed interest in cannabis stock amid the rise in cannabis sales during the pandemic drove the company’s stock price. Meanwhile, the company will report its fourth-quarter earnings on July 29. Let’s look at what to expect.

Aphria’s top line to rise

Amid the outbreak of COVID-19, both the United States and Canada had imposed shelter-in-place order. However, the governments of both countries had termed medical cannabis as essential and allowed its sales during the restriction period. Meanwhile, some provincial governments in Canada even allowed sales of recreational or adult-use cannabis as well.

Earlier, many cannabis producers had blamed the slow rollout of retail stores in some of the largest provinces, such as British Columbia and Ontario, for lower sales growth. However, both provinces have addressed the issue by offering additional licenses.

So, all these initiatives have led to a surge in cannabis sales. As reported by Statistics Canada, cannabis sales in Canada hit a new record of $185.9 million in May.

In the third quarter, Aphria’s production facilities Aphria One and Aphria Diamond started operating at their full capacity, increasing its production. Also, the company, with its superior quality and product differentiation, has managed to gain market share in its previous four quarters. So, I believe all these factors could drive Aphria’s fourth-quarter sales.

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Aphria’s EBITDA could also increase

Aphria has reported positive EBITDA in the past four quarters. Very few cannabis companies have managed to achieve this feat. When the majority of the cannabis companies are burning cash, Aphria, under the leadership of Irwin Simon, has struck the right strategy, which focuses on both growth prospects as well as profitability.

Due to the delay in the licensing of its Aphria Diamond facility, the company had to purchase $30 million of cannabis from third-party suppliers during the second and third quarters, lowering its EBITDA margins. However, with both its facilities operating at full capacity, the company would be less dependent on other supplies. So, the company’s margins could improve, driving its fourth-quarter EBITDA.

Recent past performance

Aphria had outperformed analysts’ consensus EBITDA expectations in the first two quarters while missing out on the sales expectations. However, in the previous quarter, the company beat both its revenue and EBITDA expectations

Meanwhile, the company had reported revenues of $391.1 million over the three quarters, which represents year-over-year growth of over 260%. Also, its EBITDA improved to $9.5 million from a loss of $40.6 million during the same period.

However, the company’s management has withdrawn its earlier announced guidance for this fiscal citing uncertainty created by the pandemic.

Bottom line

Last week, OrganiGram Holdings had reported a disappointing third-quarter performance. However, I am bullish on Aphria. When many of the cannabis companies are struggling with their cash position, the company’s position looks strong, with $515.1 million cash at the end of the third quarter.

So far, the company has launched only vapes in the Cannabis 2.0 segment. Meanwhile, the company plans to launch its other products, such as edibles, beverages, and tropicals in the future, which could further unlock its growth potential.

Given its reliable track record, impressive growth potential, and stable cash position, Aphria is well positioned to strengthen its market share in the cannabis space. I therefore believe Aphria is a good buy ahead of its earnings.

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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 Rajiv Nanjapla has no position in any of the stocks mentioned.

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