There’s a Pretty Strong Speculative Case for Buying Aphria Stock

Will Healy - finance.yahoo.com Posted 5 years ago
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Amid a disappointing earnings report, Aphria (NYSE:APHA) continues on the path to recovery. Allegations regarding an asset purchase and conflicts of interest in the C suite sent Aphria stock from over $16 per share to under $4 per share for a brief time.

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However, a new CEO has restored some confidence in the company. The most recent earnings numbers stopped the upward move in APHA for now.

Still, with a compelling valuation and a well-regarded consumer industry executive leading the company, APHA could find itself on the way to recovery.

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For the sake of full disclosure, I bought Aphria stock when it still traded on the pink sheets. However, I got out soon after it moved to the New York Stock Exchange. I made this decision when questions about conflicts of interest within the C suite and the legitimacy of its Latin American assets came to light.

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A Closer Look at Aphria

Fast forward to today, and both CEO Vic Neufeld and co-founder and Cole Cacciavillani have left the company. Further, a review of the purchase determined that Aphria paid a high but acceptable price for legitimate assets in Latin America.

Aphria has now appointed Irwin Simon as its interim CEO. Simon founded Hain Celestial (NASDAQ:HAIN) in 1993. Over 25 years, he made it one of the leading natural and organic food companies in the U.S. This has helped restore some confidence in APHA. It also mirrors the situation at GE (NYSE:GE) who has also hired a CEO from the outside with a reputation for success.

The existence of recent reputational issues tends to breed mistrust. However, it also leaves more risk-tolerant traders with reasons to buy. Aphria stock trades at a forward price-to-earnings (PE) ratio of 22.9.

This comes in well below average multiples in the cannabis industry. Today, marijuana stocks often support price-to-sales (PS) ratios in the triple digits. That also appears cheap when considering predicted earnings increases. Wall Street expects profit growth of 140% this year and 75% in fiscal 2020.

I think these factors take Aphria back to where it was before the controversies took place. APHA may never catch up to the likes of Canopy Growth (NYSE:CGC) or Aurora Cannabis (NYSE:ACB) in terms of valuation. Still, CGC supports a PS ratio of just over 140. That same multiple stands at around 20 for APHA stock. This leaves APHA will potential to expand that multiple.

APHA Is a Buyout Candidate

Another possibility lies in a buyout. his does not mean the hostile bid like the one recently attempted by Green Growth Brands (OTCMKTS:GGBXF), but one from a larger player.

I usually avoid recommending stocks for this reason (buyouts can come at any price level). However, given Aphria’s low multiple, buyers will likely look to APHA rather than other cannabis firms.

Moreover, it has established a presence in key markets offshore. Yes, it recently divested its U.S. assets. However, it holds the holdings in Latin America which caused issues for the company last year. This includes cultivation acreage in Colombia and Jamaica as well as research-related assets in Argentina.

Also, its purchase of Nuuvera brings Aphria into Europe, the Middle East, and Africa. Further, it has recently become one of the few firms to acquire five licenses (the legal maximum) to cultivate weed in Germany. This should bring significant growth for APHA even if they never enter the U.S.

Bottom Line on Aphria Stock

Now that the company has put conflicts of interests behind it, a speculative case for Aphria has emerged. Thanks in part to the lower stock price, the company finds itself in a position where it earns an annual profit and trades well below most of its peers in the cannabis industry.

Moreover, a CEO with a track record of success runs the company. Also, though it no longer holds U.S. assets, holdings in other parts of the world should lead Aphria to further growth. Regardless of whether owners of APHA benefit from profit growth or a buyout, the future again appears bright for Aphria stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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