Canada’s third largest pot producer, Aphria (NYSE:APHA), has turned into a battleground stock this year. While the company has started to attract a few ardent supporters on Wall Street, such as investment firm Jefferies, Aphria’s shares remain woefully undervalued relative to its closest peers, Aurora Cannabis (NYSE:ACB) and Canopy Growth Corporation (NYSE:CGC).
Aphria’s stock is trading at around 2.2 times its 2020 projected sales, while Aurora’s shares are valued at around 13.1 times next year’s sales. Canopy’s stock, for its part, comes in even higher at nearly 19 times the company’s estimated 2020 revenue. Based on this rough comparison, Aphria’s stock comes across as way too cheap.
Should bargain hunters take advantage of Aphria’s comparatively low valuation or is this pot stock a classic value trap? Let’s look at both sides of the coin to find out…
With a peak annual production capacity of 255,000 kilograms, Aphria comes in as the third-largest pot producer in Canada behind Aurora and Canopy. This top-notch production output should eventually translate into superior gross profit margins over smaller entities and allow the pot titan to quickly expand into higher-margin product categories like edibles once this market segment officially opens in Canada later this year.
Another key advantage is Aphria’s enviable position in the high-value German cannabis market. Earlier this year, the company’s German subsidiary Aphria Deutschland GmbH secured a fifth cultivation license for medical marijuana in the country. That’s a big deal, because Germany is widely expected to the largest cannabis market in Europe upon full legalization, and one of the biggest in the world outside North America.
Now, Aphria will have some stiff competition from other top dogs, such as Aurora, Canopy, Cronos Group, and Tilray, in this all-important European market. But the company does have a solid foothold in the continent with this cultivation license. The same can’t be said for most of its lower-tier competitors. Germany should thus provide a significant boost to the company’s top line in the years ahead — despite competition from some of the industry’s biggest heavyweights.
Aphria’s lowball valuation is no accident. The company’s image took a big hit late last year after some of its top brass were targeted in a short-seller report from Hindenburg Research and Quintessential Capital Management. The crux of the situation is that the report alleged that insiders benefited from the acquisition of certain Latin American assets at inflated prices.
Although an independent committee later found that the price was within a reasonable range, Aphria still took a whopping…
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