Left and right, Seaport Global is rolling back
prices -- or at least price targets -- on Canadian cannabis stocks.
(It's kind of like a sale at Wal-Mart, but in a bad way). On
Wednesday we looked at analyst
Brett Hundley's price
target cut on Hexo stock. Today, we'll be taking a look at his
"update" on Aphria (APHA).
In contrast to the Hexo report, which Hundley
rushed out ahead of that company's earnings, this update has no
particular catalyst behind it -- just a general feeling that the
analyst has been too optimistic about marijuana companies'
prospects in general, and needs to his numbers to account for that
Fact is, the bulk of Hundley's update on Aphria
focuses on good news. Aphria raised $350 million in convertible
debt in April, for example, filling Aphria's coffers with enough
cash "to carry it through FY2020 and into FY2021," in the analyst's
opinion. And by the time 2021 rolls around, says the analyst,
Aphria should be solidly free cash flow-positive, and able to
generate its own cash, rather than having to borrow it from
The company has also struck a deal with
privately-held cannabis "vape" device maker PAX Labs to supply
"pods" filled with heat-able and inhalable cannabis oil, to be used
in PAX's vaporizer devices when the market for such value-added
marijuana products opens up in Canada "later this year."
Nonetheless, Hundley says he's cutting his
forecasts for both Aphria's sales and earnings before interest,
taxes, depreciation, and amortization (EBITDA) in both fiscal 2020
and 2021. Sales estimates for FY2020 inch down 3% to C$520 million,
and ratchet back 4% to C$851 million in FY2021. EBITDA estimates
for 2020 go from a C$39 million profit to a $3 million loss. And in
2021, EBITDA estimates fall 15% to $148 million.
Regardless, Hundley maintains a "buy" rating on
the stock, albeit at a lower $13 price target ($16 previously). (To
watch Hundley's track record, click here)
The big picture
Well, for one thing, even if sales and EBITDA
estimates are falling, Hundley still sees great things in store for
Aphria. If all goes as planned, Aphria should nearly triple
marijuana sales in 2020 over 2019, then grow them another 64% in
2021. By that point, Aphria should be selling enough weed that its
operations will become profitable. Whether they'll be profitable
enough to justify Aphria's $1.8 billion market cap remains an open
question. Then again, though, you could say that about almost any
cannabis stock these days.
Rather than focus on valuation, therefore,
investors might be best advised to focus more on Hundley's market
commentary, using it as a guidepost for "what happens next." In
that regard, the analyst notes that "Aphria believes that vapes and
concentrates will represent close to 30% of the entire Canadian
adult-use market by 2021 ... Vape products will likely follow in
legal US state footsteps and become a meaningful proportion of the
new Canadian market."
In other words, Hundley is of the opinion that
investors need to peer through the marijuana smoke haze, and start
focusing instead on which companies will dominate the market for
marijuana vapor, which would include devices ("vaporizers" or
"e-cigarettes"), the cannabis oil they heat for inhalation, and the
pods that oil comes in.
This, in the analyst's view, is where the market
is heading -- and probably where you will want to be invested going
To read more on the nitty gritty of whatâs going
on in the rising cannabis industry, click here.
Read more on APHA: