Better Buy: Aphria vs. Cronos

The marijuana industry has been a mess for much of the year, with some of the top pot companies losing a significant amount in market value since March. However, despite these recent troubles, the future promises to be bright for the industry — as marijuana sales are set to increase significantly over the next decade — and it’s up to us to separate the wheat from the chaff. With that in mind, let’s turn our attention to two of the largest cannabis companies by market cap: Aphria (NYSE:APHA) and Cronos Group (NASDAQ:CRON).

Investors who bet on Aphria at the beginning of the year are…

probably a bit happier than those who bet on Cronos: Aphria’s shares have lost “only” 8% of their value, while Cronos’ shares are down by 35%. But which of these stocks is more likely to outperform the other in the future? Let’s dig into their respective businesses and find out which is more attractive at the moment.

Why Aphria might be the better option

Aphria became one of the more prominent cannabis companies in Canada for two major reasons. First, the company is one of the few that have supply agreements with every Canadian province. Second, Aphria is projected to be one of the leaders in the Canadian cannabis market in terms of production capacity. When operating at full capacity, the company should produce about 255,000 kilograms of cannabis per year.

However, the Canadian market has encountered severe issues, including a lack of legally licensed retail stores. Thankfully, Aphria has a significant presence outside of its domestic borders, most notably in Germany. The company’s subsidiary, CC Pharma, distributes pharmaceutical products to thousands of stores across Germany and other European countries. Aphria introduced a cannabidiol-based cosmetic line — dubbed CannRelief — which it distributes in the German market through CC Pharma.

Further, another of Aphria’s subsidiaries in Germany, Aphria Deutschland GmbH, completed the German tender process and was awarded five lots (the maximum allowed) for the cultivation of the three strains of medical cannabis approved by the relevant authorities. The company is building an 8,000-square-meter growing facility to distribute medical cannabis products in the country.

Lastly, Aphria is looking to build a vast distribution network in South America through its LATAM acquisition, which famously landed it in a world of trouble. According to some allegations, this acquisition was used by some of Aphria’s executives as a front to enrich themselves. Bad optics aside, though, the South American market could become an interesting one: Uruguay legalized the recreational use of pot, and Mexico has been flirting with the idea. With assets in countries such as Colombia, Argentina, and Brazil, Aphria could benefit from this market.

Aphria’s shares are currently worth $5.50, slightly less than they were worth in early January (about $6). After its stock price took a beating at the end of last year, the company started the year on a strong note, only to succumb to industrywide pressure over the past six months or so. At its current levels, Aphria is trading at about 18 times past earnings — a rare reasonable valuation in the cannabis industry — and the stock is worth considering, but given the issues in the cannabis industry, it might be best to stay on the sidelines for now.

Cronos’ deal with Altria leads the way

Cronos is expected to reach a peak production output between 110,000 kilograms and 120,000 kilograms, and the company has supply agreements with two Canadian provinces totaling about 50% of the Canadian population. However, the best argument for buying shares of Cronos might be its partnership with cigarette maker Altria.

The tobacco giant acquired a 45% stake in Cronos for about $1.8 billion in a transaction that closed in March. As a result, Cronos’ pile of cash exceeds that of almost any of its peers — money it can use to fund its growth efforts — and the company can profit from Altria’s marketing expertise and vast distribution network. Case in point, Cronos recently announced the launch of its hemp-derived CBD brand, Peace+, in the U.S. The company will “test the market” by putting its products in 1,000 retail stores throughout the country, a feat it was able to achieve thanks to its partnership with Altria.

Cronos does have other weapons. In September, the company closed its acquisition of Redwood Holding — a distributor of CBD products in the U.S. — for $300 million. Redwood distributes hemp-based CBD products through U.S. retailers under the brand name Lord Jones. Last year, Cronos began a partnership with Massachusetts-based Curaleaf Holdings to provide it with a minimum of 20,000 kilograms of cannabis per year for five years.

Outside of North America, Cronos boasts a presence in Germany and Poland. In 2017, the company signed a five-year distribution agreement with G. Pohl-Boskamp — a pharmaceutical company with a retail network in Germany — to distribute medical cannabis products in the country. Finally, in 2018, Cronos entered into an agreement with Delfarma — a pharmaceutical wholesaler with a vast distribution network in Poland that reaches 40% of the population — to supply medical cannabis products to distribute in the Polish market.

Cronos also started the year on a strong note with its share price increasing to about $24, only to fall drastically to its current level at $7.28. And though Cronos is now about a dollar off its 52-week low, its most recent financial performance did not inspire confidence, and the company still isn’t a buy in my view…

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