Aphria shares soared 32% Friday to lift the broader cannabis sector, after the Canadian company posted a surprise profit for its fourth quarter and offered upbeat guidance for fiscal 2020.
Aphria APHA, +36.35% APHA, +35.65% said it had net income of C$15.8 million ($11.9 million), or 5 cents a share, compared with a loss of C$5 million, or 43 cents a share, in the year-ago period. Sales rose more than tenfold to C$128 million from $12 million a year ago.
The company said it expects fiscal 2020 revenue net of excise taxes of C$650 million to C$700 million. There are no reliable FactSet estimates for the company, but GMP said the numbers and outlook were strong and reiterated its buy rating on the stock.
Analyst Justin Keywood said a government contact at the distribution level had offered “very positive feedback” on Aphria in a recent call.
“The quality of Aphria’s products was mentioned as one of the best among all LPs and our contacts also said the company has greatly improved operationally,” the analyst wrote in a note to clients. “We also heard there were strong efforts from Aphria to improve relationships with its partners and distributors following the transition last year.”
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Jefferies analyst Ryan Tomkins agreed. “In the context of poor sector sentiment, profitability becoming an increasing focus, and guidance scarce, this print is very reassuring and supports our conviction in the name,” he wrote in a note to clients. Tomkins also rates the stock as buy.
Aphria Chief Executive Irwin Simon told MarketWatch the company’s success is partly due to efforts to keep growing costs low. It helps that marketing costs are minimal, given Canada’s strict laws on promotion. But the company also benefited from C$50 million it received from Green Growth Brands Inc. GGBXF, +4.55% GGB, +0.00% after that company’s hostile takeover bid failed. Green Growth launched the bid after short-sellers released a report that called into question several of the company’s assets and pointed out alleged wrongdoing by former executives related to several acquisitions.
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Aphria said it will receive another C$39 million in November from Green Growth.
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Cronos shares CRON, +5.77% CRON, +6.62% rose about 5%, after the company said it is acquiring four subsidiaries of Redwood Holding Group LLC, a maker of hemp-derived CBD-infused skin care and other products, for $300 million in stock and cash.
Redwood was co-founded in 2017 by Robert Rosenheck and Cindy Capobianco, who will join Cronos and continue to lead their platform. Under the terms of the agreement, Cronos will pay $225 million in cash and the balance in newly issued stock. It will fund the cash portion of the deal with cash in hand. Tobacco giant Altria Inc. MO, +0.52% has invested $1.8 billion in Cronos, acquiring a 45% stake.
Tomkins of Jefferies said the deal works in a number of ways.
“First, it’s putting their large cash pile to work,” he wrote in a note to clients. “Second, it gives exposure to the worlds biggest market. Third, it appears strategically astute. We’ve argued for a while that unless FMCG (fast-moving consumer goods company) or an already established CBD brand, it will likely be difficult to penetrate.”
However, with Cronos stock still trading at premium over its peers, Tomkins is sticking with an underperform rating: “We think investors seeking safety in the large cash pile and also taking the Altria investment as validation of a superior business model,” he wrote. “With cash not a source of long term value in itself, and the model yet to be proven (we don’t say it won’t), we think valuation is too rich at these levels.”
Cannabis Watch: For more of MarketWatch’s coverage of cannabis companies
Sundial Growers Inc.’s stock SNDL, +9.08% was up 14%, recouping part of the 30% loss suffered Thursday on its first day of trading on Nasdaq. The Canadian licensed producer priced its initial public offering at $13 a share. The company had losses of C$16.7 million, or 24 cents a share, in the March quarter, with revenue of C$1.7 million.
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Renaissance Capital, a provider of institutional research on IPOs and IPO ETFs, said the three things investors need to know are: “1.It has two facilities in Alberta with annual capacity of 60 million grams and is adding a new facility in British Columbia to reach total annual capacity of 95 million grams; 2. Canada’s recreational cannabis market is expected to reach US$4.8 billion by 2024; and 3. Unprofitable and levered; expansion will require significant capex.”
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Elsewhere in the sector, market leader Canopy Growth CGC, +4.00% WEED, +3.60% was up 3.2%, Tilray TLRY, +2.83% was up 0.9%, and MedMen shares MMNFF, -0.40% were down 0.9%. OrganiGram Holdings’s stock OGI, +1.56% was up 0.3%.
GW Pharma GWPH, -0.85% was up flat. Software company Akerna KERN, +3.48% was up 3.5% and Charlotte’s Web CWEB, +5.17% was up 3.6%. Aleafia Health Inc. ALEAF, +0.38% ALEF, +2.83% was up 2.8% and Green Organic Dutchman TGOD, +6.97% TGOD, +6.97% was up 4.1%. Aurora Cannabis ACB, +6.59% ACB, +5.91% was up 4.6%.
The ETFMG Alternative Harvest ETF MJ, +3.42% was up 2%, with 23 of its 38 component stocks higher. The Horizons Marijuana Life Sciences ETF HMMJ, +5.12% firmed 3.6%, with 29 of its 54 components higher.
The Dow Jones Industrial Average DJIA, -0.81% was down 0.9% and the S&P 500 SPX, -0.96% was down 1%.
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