Dilution and spending put a damper on Aphria Inc.'s (APHQF) quarterly earnings. Yesterday's fiscal fourth quarter release for the Canadian-based cannabis company based in Leamington, Ontario, didn't encourage investors, as the stock is down today.
The sheer amount of stock and cash based spending that has taken place this year has limited the return on the company's admittedly beautiful revenue growth. Because of this, it will take much longer for Aphria's sales to translate to meaningful earnings for shareholders. Since the stock was already priced well above earnings potential, shares are down 0.86% to $8.07 less than an hour before Thursday's close. The stock was down 5% after hours yesterday. I bought Aphria last fall when I was searching for a non United States cannabis play; and sold it at over $18 a share early this year. It was a stock I expected to own for a long time. Speculation-based momentum has a funny way of changing your plans.
Today, I still see a lot of speculation based pricing in the stock, and expect better opportunities for acquiring shares to present themselves in the coming weeks. Until the sales of legalized recreational Canadian sales start to show on the income statement, I don't think anything will run this one higher. It's already too expensive. And every time there's earnings potential to boost it, the company dilutes the stock to make deals. I still like the long term potential here, but it's just not time. It's not that the potential isn't there. The market has simply already baked it into the stock price. And I hate overvaluation. If you want to overpay, and wait for all those supply expansions and sales contracts to come to fruition, good for you. I however am looking for a better price.
Relative to many competitors, Aphria does pretty well in terms of the finances. Their big appeal is that the firm has been profitable year to year, whereas rivals have remained relatively negative in income. The fiscal fourth quarter was a bit different. The revenue growth keeps on coming. Sales increased by over 110% year over year to $12.026 million. (Financials in this article are in Canadian dollars). Adjusted gross profits are up 93% to $9.47 million. Adjusted gross margins are down a bit to 78.7%, but I'm not going to fault them too much on that one. All of the expenses being incurred stopped these gains from translating to income. A net loss of $4.99 million represents a 92% worse overall result year over year. Will all the spending and expenses ultimately lead to bigger payoffs later? That's the plan and hope that everyone is waiting for.
Another big bragging right that the company retains, is its 11th consecutive quarter of positive EBITDA. Adjusted EBITDA of $2.2 million marks a pullback year over year; but these earnings remain up 38% for the fiscal year as a whole. On the production side, all in cost of goods sold remained virtually the same, with a $0.01 increase; though cash cost to produce actually declined by $0.01.
The real complaint is simply the rising share count and spending relative to the actual growth. Sales are phenomenal, but the company had losses of $0.06 a share in the fiscal fourth quarter. For the full year, the company made $0.18 per share. That gives the current stock price range a trailing P/E of around 45. For the fourth quarter, the rising share count actually helped them make the net loss look less severe in regards to earnings per share. On the full year basis, it was detrimental. Diluted outstanding shares increased 49% in Fiscal 2018 to 165,914,000 vs. 111,427,893 in 2017. That diluted their net comprehensive income of $28.67 million to half of what it could have meant to shareholders.
To be clear, I can't blame Aphria management for one second regarding their stock based spending. If you have the means to drive total assets and market positioning without taking on debt, I'd do it too. But regarding the stock price, it does have a meaningful impact on when people should and should not buy in.
I still like Aphria as a good play on the growing cannabis market. The U.S. is clearly a dead zone for the market right now, and I am all in on Canadian players. To buy back in to Aphria, I want to see a slowdown in the expansion/acquisitions. It's time for Aphria to start focusing on sales and profitability. Construction of an extraction center is fine if there's a market for it, but these large scale acquisitions need to stop. They've established themselves as the low cost producer. It's time for organic growth. If they don't, shareholder earnings will keep getting broken up between a progressively spread out pie. Cash on hand is over $50 million. I want to see Aphria run itself as a business with sales and income now.
So what about the stock price? I personally don't see a lot happening in Aphria's fiscal Q1'19. The big momentum factor that seemed to drive the stock price through the past month was the hope that they'd snag a deal with Molson Coors (TAP). The big brewer has suffered from stagnating sales these days, and had been rumored to be hunting a partner for cannabis infused drinks. It's a weird concept right? Nonetheless, Molson Coors has in fact chosen a partner for this strange venture. But it wasn't Aphria. That deal has instead gone to Hydropothecary Corp (HYYDF). It's a disappointing blow for Aphria investors. I do feel that this news is also contributing to the stock pullback today. Overall, it's tough to say why they went the other direction; so I suspect that the more concentrated efforts on HYYDF's hand made it an easier pick. Aphria is pulled in so many directions right now. International expansion, constant acquisitions, a more headstrong CEO, perhaps Hydropothecary was just easier. It doesn't really matter at this point.
Recreational sales aren't really primed to start until this fall; so the rest of the summer/early autumn probably won't yield much. To that end, I don't see big earnings until fiscal Q2'19. Because of this, I think opportunities will present themselves at multiple times to acquire shares in the $7-$8 range. The stock broke below $8 this morning, and I don't see any catalysts to stop it from heading toward $7.50. Finding forecasting is tough, but I have seen some estimates of $0.76 per share next year. If they hit that, buying in at $8 would give you a forward P/E of 10.7. That's pretty darn good. So if you're a long term bull, ignore me completely. If you're entirely about eking out every little bit of value that you can, I see there's some downside in the short term. I personally am looking for a buy in around $7.50. Based on historical trading through the past few months, I think that's an achievable figure when you consider the lack of financial momentum pushing the stock right now.