As the cannabis stocks trade at multi-year lows, the market is looking to grasp at any positive news from the upcoming earnings season. Any positive news from Q4 sales or insights on the Cannabis 2.0 rollout in Canada will breath some relief into the market.
The North American cannabis industry has plenty of catalysts by midyear 2020, but the related companies were built for robust revenues and much larger markets. The keys to watch in the upcoming earnings reason are the ability of cannabis companies to generate profits from the current market opportunities and not the previous grand expectations.
Several big catalysts for cannabis revenue growth in 2020 include CBD in the U.S., Cannabis 2.0 rollout in Canada, additional retail stores in Ontario and the approval of recreational cannabis in U.S. states such as Illinois. Not to mention, the U.S. always has the potential for the federal government to approve cannabis allowing for the ultimate prize for cannabis companies and investors alike.
The market projections for the global cannabis market reaching $200 billion in the future should stand. For now, cannabis stocks in Canada and the U.S. have to focus on maintaining liquidity to survive and eventually thrive in the disappointing sales ramp in North America and around the globe. A lot of the Canadian issues should resolve themselves over the next few quarters, but the illicit market remains a formidable competitor and investors shouldn’t assume the profit picture improves dramatically in the near term with so much competition.
We’ve delved into three cannabis companies that recently reported quarterly results through November 30 with commentary covering the early part of January. Using TipRanks' Stock Comparison tool, we lined up the three alongside each other to give us an idea of what the Street thinks is in store for the trio in the year ahead.
The most influential earnings report of early January was Aphria. The company is one of the larger Canadian cannabis LPs and provides a good indication of market demand into the first couple of weeks of January.
The good news is Aphria grew net cannabis revenues by 9% sequentially for the quarter ending November 30. The bad news is that the cannabis company cut FY20 revenue guidance by an astounding $75 million.
The revenue cut wasn’t a huge shock to the market considering the Ontario regulators pushed new retail store openings out until April and Aphria has a fiscal year ending in May. This timing issue combined with vape bans in Alberta and Quebec and the possibility of a major revenue ramp up this fiscal year was near impossible.
For FQ2, the company reported revenue declined by C$5.5 million to C$120.6 million. The major revenue hit came from a reduction of distribution revenue in Germany.
The stock dipped 8% on the news to $5 based on the revenue cut and the hit to EBITDA targets. Aphria now expects FY20 EBTIDA of only C$35 million to C$42 million, down from an estimate of over C$90 million.
The company remains one of the rare Canadian companies generating positive EBITDA due to reasonable operating expenses, but the market needs to absorb this revenue cut before the stock can rally this year.
All in all, Wall Street is split between the bulls and those who are more cautious on the cannabis player, with TipRanks analytics exhibiting APHA as a Moderate Buy. Out of 4 analysts tracked in the last 3 months, 2 are bullish on Aphria stock while 2 remain sidelined. With a return potential of 23%, the stock's consensus target price stands at $6.36.
OrganiGram had one of the better reports in the cannabis sector in the last few quarters. The stock has soared over 45% on the news, yet OrganiGram isn’t even back to the highs from November.
For the quarter ending in November, the Canadian cannabis company reported net revenues of C$25.2 million. The amount beat estimates, but the company is still below the revenue levels from mid-2019 and the beat occurred due to low calorie wholesale revenues of C$9.5 million.
The rally is more of a relief that the numbers didn’t get worse despite investor knowledge that monthly cannabis sales in Canada have slowly improved throughout the year. In addition, OrganiGram generated quarterly EBITDA of C$4.9 million for a 9% EBITDA margin.
The company has a fully diluted market cap of $500 million with a FY21 sales target in the $170 million range. The stock trades at a reasonable 3x forward sales, but OrganiGram only has a minimal C$34 million cash balance and already has C$85 million in debt.
The company forecasts having enough capital to fund operations and capital expenditure plans, but those plans include rolling out Cannabis 2.0 products in 2020 and further facilities. Investors should expect OrganiGram to take advantage of this stock rally to $3 to utilize the at-the-market equity program to raise the C$32 million available under the program after raising C$23 million subsequent to quarter end.
Where does the Street side on this cannabis producer? It appears mostly bullish. Out of 10 analysts polled by TipRanks in the last 3 months, 6 are bullish on OrganiGram stock while 3 remain sidelined and one is bearish. With a return potential of nearly 43%, the stock’s consensus target price stands at $4.73.
KushCo provided an alternative view to the cannabis sector as the company is focused on providing products and services to the U.S. cannabis market. The company took a revenue hit in the last quarter from the health concerns in the U.S. vape market.
Quarterly revenues were up 38% from last year to $35 million, but the numbers were down from the $47 million reported in the prior quarter. KushCo missed analyst estimates by a wide margin as customers reduced vape inventory levels in fears of bans by state regulators.
The company still guided to full year revenues of $240 million in expectations that customer orders catch up over the remaining three quarters of the year. KushCo laid off 53 people in order to improve the profitability picture after reporting a $12.5 million loss in the quarter, but the employee reduction only saves ~$4.3 million in annual savings.
The stock has a minimal market valuation of $175 million, but the tough market and limited margins should leave investors on the sidelines here. KushCo continues to lose too much money and only ended the November quarter with a cash balance below $15 million.