Aphria (TSX:APHA) Is Not a $20 Stock, But it’s Worth Buying at These Levels

Marijuana leaves, cannabis on a dark background, beautiful background, indoor cultivation

Back in December, I wrote that to value Aphria (TSX:APHA)(NYSE:APHA), one must discount its questionable Latin American assets all together and to focus only on its domestic growth potential. Based on this analysis, I estimated that the stock presented 50% upside from its then mid-$5 range. Even with all overhang from the short-seller report, Aphria presented a tremendous buying opportunity.

Now that six months have passed since my original estimate of $7.50/ share, it’s time to revisit Aphria to see if there is still room for growth with this controversial name.

Not a $21 stock

Firstly, let’s just rip the band-aid off: Aphria is not going to return its +$20 highs any time soon. The +$5 billion market cap Aphria commanded when it was trading north of $20 was based solely on sector-wide euphoria and growth prospects that had little chance of ever materializing. More importantly, the all-time-high market cap was a feature of a controversy-free company that seemingly had a strong international presence and roughly third- or fourth-place market share in the Canadian market.

Now, six months later, we begin to see that Aphria was hardly a well-run company, and the international footprint was much smaller than anticipated. For example, those apparently valuable Latin American assets have experienced a write-down of $50 million (representing roughly a fifth of their value), despite management’s earlier assurances of their fiscal due diligence. And while the case can be made that the write-down was a non-cash charge, the fact remains that shares were issued for those assets and the dilution stays on the books, regardless of accounting policies.

Furthermore, in stark contrast to its major-league peers, the company has withdrawn its plans to pursue the U.S. market, which could lead it to trail its competitors once we see federal legalization south of the border.

However, to give credit where it’s due, Aphria is continuing with its expansion plans in Europe, having won five out of 13 cultivation lots for medical marijuana in the nascent German market. That said, the European market is still in its infant stage, and forecasts of European sales should be relatively conservative at this point.

Aphria’s latest earnings also pointed to an increasingly competitive Canadian market. In Q3 of this year, Aphria sold 23% less product than in the previous quarter, while all-in costs of sales adjusted for packing and distribution increased 60%. Moreover, while many were predicting Q3 medical sales to come in below Q2, as recreational sales ramp up and cannibalize the medical sector, the last quarter also saw recreational sales decline, along with the average selling price in the adult-use segment falling to $5.14/ gram from $6.32/gram.

What is Aphria worth?

To value this company, once again we must discount its Latin American businesses entirely and focus solely on its domestic and European operations. Using analyst estimates of a $5 billion Canadian market in 2021 and a 15% market share, I predict Aphria’s 2021 domestic sales will come in at roughly $750 million, or $800 million when combined with sales from its European subsidiaries.

Based on a 28$ EBITDA margin and 14 times forward multiple (a discount to its large-cap peers, owing to lack of U.S. penetration, and management risks), we can assume the share price to be worth roughly $12.50 per diluted share. Applying a 10% discount to the fair value to compensate for sector volatility and execution risks (AKA loss of shareholder confidence), we arrive at a $11.25 price, or 25% upside from current levels. In other words, Aphria is a buy at these levels, as long as you are not anticipating a two- or three-fold increase in its share price any time soon.

You might be missing out on one of the biggest opportunities in Canadian investing history…

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.

One grassroots Canadian company has already begun introducing this technology to the market – which is why legendary Canadian investor Iain Butler thinks they have a leg up on Amazon in this once-in-a-generation tech race.

This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.

Learn More About This TSX Stock Now

More reading

Fool contributor Victoria Matsepudra has no position in any of the stocks mentioned.

Source: The Fool
Aphria (TSX:APHA) Is Not a Stock, But it’s Worth Buying at These Levels
The Fool

The Motley Fool
Contributor for investorsnews.ca
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts