In this report, we compare key metrics between Aphria and Canopy Growth, two of the largest licensed Canadian marijuana producers. Our fiscal 2019 EBITDA estimate for both companies are dozens of millions of dollars below the lowest sell-side estimate. In our discussions with those in the industry and analysis of the market, we believe our estimates will end up being closer to actual reported figures.
We believe Aphria’s share price will increase (or decrease less) versus Canopy’s beginning from July 14th 2017 to the average last ten trading days closing price in October of 2019. The stock call is good for as long as Aphria’s share price trades below $6 for an entire trading day and as long as it is listed on Perspectec.com. We are not allowed to trade Aphria or receive any form of compensation from any other parties besides our subscribers.
Summary of why we believe Aphria’s share price will appreciate versus Canopy Growth
We do not believe Aphria’s current stock price is fully anticipating the rise in kilograms sold, EBITDA and free cash flow generation in relation to its peers. While sell-side analyst forecasts are very aggressive, investors appear to rightfully not be following their estimates. Otherwise the stock price of Aphria (and Canopy) would be atleast double their current levels.
Source: Company Reports and Perspectec
Canopy Is A Top Line Story, But Organic Growth Is 10% Q/Q – At first look, Canopy’s quarterly sales have improved materially over Aphria’s. Canopy’s recent spike is due to the closing of its acquisition of Mettrum. This contributed to two months’ worth of Mettrum production in Canopy’s last reported quarter, likely over 300 kilograms. By our estimates Canopy’s organic growth rate of Kilograms sold Q/Q was just over 10% excluding Mettrum versus their reported revenue growth of about 50% Q/Q.
Canopy’s is focused on Brands and Products versus Costs Per Gram – Mettrum’s costs per gram for it’s last reported quarter was $3.64 versus Canopy’s at $2.90. This raised Canopy’s overall cost profile higher. In April 2017, Aphria also reported higher costs per gram due to adverse weather effects, and as a result, its share price also moved lower. But the stellar performance in Q4/17 (May 31st 2017 quarter end) had cost per gram at new record lows of $0.79. By competitor definitions and Aphria share price moved up 14% on the trading day of the release.
Source: Company Reports and Perspectec
Today, both companies generally trade together with the likely cause being short-term traders controlling the daily price movements. After reporting materially higher sales in late June, Canopy has continued to move lower. We believe it was not the slightly lower than expected sales post Mettrum acquisition that caused the drop, but rather the higher costs per gram with no real catalyst to move costs lower.
Source: Company Reports and Perspectec
Forecasted Financial Metrics Put Aphria Ahead – Two of us here at Perspectec have created financial models for both companies while conducting months of research focused on each stock. We believe these points and others to be discussed later will put Aphria’s future earnings and free cash flow in two years time materially higher than Canopy’s. Aphria’s Q3/17 higher costs appear to be more due to recent weather conditions and capacity expansions. Canopy will have a materially higher selling price due to their direct to market approach, however the sales and marketing expenses in the face of legislation pushing back against marketing will eat materially into their EBITDA.
Projected earnings will be a larger concern for investors than growing sales, with increasing institutional ownership likely to take place after recreational marijuana has been legalized.
With regulatory and financial hurdles out of the way, Aphria’s desire and cost structure will put them in a good position to be a primary supplier to pharmacies. Canopy’s desire to be the leading brand of marijuana will require significant marketing expenditures and we believe will be a more difficult path reach sustainable profitability. Below are our projections of both companies KGs sold, EBITDA and Free Cash Flow.
Source: Company Reports and Perspectec
Source: Company Reports and Perspectec
Source: Company Reports and Perspectec
Based on Aphria’s clearer path to positive free cash flow after its phase four expansion is complete, we believe its share price has a clearer path to material positive free cash flow. Primarily because of this, we see believe its share price will increase (or decrease less) than Canopy Growth’s share price.
Important Disclosures and Disclaimer
This publication is produced by Perspectec Inc. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure,
distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Perspectec Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, independent contractors, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof.
No publications, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments.
This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Please refer to Persepctec Inc.’s terms of use disclosure and privacy policy https://perspectec.com/term_of_use
|
RATING |
CURRENT RATING |
PREVIOUS RATING |
|
BUY |
🗸 |
🗸 |
|
HOLD/NEUTRAL |
|
|
|
SELL |
|
|
For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
