Aphria (TSX:APH) may have seen a big jump in revenue in its last quarter but the licensed cannabis producer should still be treated as a ‘show me’ stock, says Brian Madden of Goodreid Investment Counsel, who argues that like the rest of Canada’s marijuana companies, Aphria should be viewed as a commodity crop producer whose operating margins are likely to be close to the bone.
Leamington, Ontario’s Aphria reported its fiscal fourth quarter financials on Wednesday, boasting revenues of $12 million for the three months ended May 31, a 17 per cent increase on the previous quarter and more than double the $5.7 million topline in Q4/17.
“We had a healthy fourth quarter and a solid year with many achievements we are proud of,” said Aphria’s CEO Vic Neufeld. “We are excited and ready to hit the ground running on the first day of legal adult-use.”
At the same time, the company posted a net loss for the quarter of $5.0 million, double the $2.6 million loss in Q4/17. Aphria’s share price tumbled in trading on Wednesday and Thursday, dropping 8.7 per cent in two days.
And while there are plenty of skeptics concerning the potential of Canada’s soon-to-be-legal pot sector, Madden says shorting these stocks is not the answer.
“Shorting a stock is not symmetrical with just not owning it,” says Madden, senior vice-president and portfolio manager at Goodreid, to BNN Bloomberg. “If you short it … there’s unlimited downside because if you’re long a stock, it can only go to zero but if you short a stock, it can go to infinity. Imagine the pain that would have been inflicted if you shorted Netflix, for instance, thinking that it was overvalued five or six years ago.”
“I’m not sure I would necessarily have the nerve to short this stock but I can tell you that we’ve avoided the space,” he says. “Generally, our thoughts on the sector are that marijuana, until proven otherwise, is an agricultural commodity —it is not a branded product … it’s a show-me story.”
Last month, Aphria announced that it had signed a memorandum of understanding with the BC Liquor Distribution Branch to supply over 5,000 kg of cannabis for the first year of recreational cannabis operation. The BCLDB has stated that a total of 31 federally licensed cannabis had signed MOUs with the province.
“If it’s not a branded product, then there’s no reason to expect that these companies should have 50 or 60 per cent operating margins like the liquor companies or Big Tobacco do,” Madden says. “I think a better analogy would be of a farmer growing 1,000 acres of canola in Manitoba where the operating margin might be five or six per cent. So, if these are ultimately going to settle down to become low-cost commodity producers, they shouldn’t trade at ten or 15 times sales.”
We Hate Paywalls Too!
At Cantech Letter we prize independent journalism like you do. And we don't care for paywalls and popups and all that noise That's why we need your support. If you value getting your daily information from the experts, won't you help us? No donation is too small.