Legal marijuana is still a relatively new industry, one with a lot of growth potential but also volatility. Some cannabis market investors are closely watching Aphria Inc. (NYSE: APHA), a Canadian manufacturer of medical and recreational pot products.

The company reported surprisingly good earnings a few weeks ago, showing a profit on strong sales. “Our growth has enabled us to be one of the few profitable, publicly traded distributors,” CEO Irwin Simon said last month. EBITDA (earnings before interest, taxes, depreciation, and amortization) has also been positive for the last four quarters.

Aphria shares closed at $3.02 on Thursday, up 1.85%. Year to date, Aphria is down 42.24%, compared with the S&P 500, which was down 11.71% for the same period. Pot stocks have generally trailed the S&P recently.

A Positive Sales Story

So far, recreational sales haven’t materialized, as some experts predicted. Canadian pot sales have been hampered by slow licensing of stores, especially in Ontario. And many consumers continue to buy on the black market, to avoid taxes and for other reasons. Some estimate that 75% of recreational cannabis is still bought on the illicit market in Canada.

In Ontario, Canada’s most populous province, only about two dozen retail stores were open a full year after sales began. So buying adult-use cannabis from a black market supplier is not only cheaper but easier.

But in regards to sales, Aphria has a positive story. The company has reported revenue growth on recreational marijuana for several quarters now. In the pharmaceutical space, Aphria says medical cannabis sales jumped 18% after coronavirus lockdowns began.

The company sold 14,014 kilogram equivalents of cannabis in its fiscal third quarter, up 98% from the previous quarter. Adult-use cannabis accounted for 8,171 kilograms, while medical products accounted for 1,352.

Aphria is also diversified beyond Canada. Last year, it completed the acquisition of CC Pharma, a German company that distributes medical pot across Europe.

Going forward, Aphria is focusing on its rollout of vape products, with edibles and gummies scheduled for later in the year. After getting off to a slow start, these cannabis derivatives are seen as a long-term growth area for marijuana companies. Canada’s federal health system was slow to license these Cannabis 2.0 products. But by last month, Aphria said it had already sold 100,000 vapes.

There are signs the pandemic could boost cannabis companies. A competitor, Aurora Cannabis Inc. (NYSE: ACB), just reported a bump in sales. In its quarterly earnings, the company reported much higher revenues than expected.

Consumer cannabis revenue was up 24% while Canadian medicals were up 6%. Overseas medical pot sales soared 125%, led by its operations in Germany.

Aurora’s recreational sales were boosted by a new cheaper product called Daily Special. The company is betting that even marijuana consumers will be more cost-conscious during a recession.

Crossing the Border

Companies like Aphria are closely watching marijuana legalization efforts in the U.S. Prior to the pandemic, the pro-pot push had momentum in several states. Those efforts are probably on a back burner now.

Political observers think national legalization is a ways off in the U.S. If pot were legalized by Washington today, the market could be worth $28 billion, according to a Barclays estimate made last year. That could balloon to $41 billion by 2028.

Right now, COVID-19 is affecting a number of scheduled legalization launches. Maine was scheduled to begin recreational sales this spring but that’s been pushed back. In Illinois, where the annual market could eventually be worth $2.5 billion, the awarding of 75 adult-use licenses has been postponed. And Missouri’s plan to license medical dispensaries is on hold for now.

Cash Story

Aphria ended last quarter with C$515 million in cash on hand. This is important because competitors are facing cash crunches that could spell trouble in a prolonged negative environment. Aphria also raised C$100 million from an institutional investor in January to fund growth initiatives in Canada and other countries.

Aphria’s strong balance sheet should stand out for analysts. “As they say, cash is king,” Simon noted.

Compared to peers, Wall Street likes the stock, which currently has six Buy ratings and two Holds. The consensus price target is $8.21. Aphria stock was up around 3% in early trading Friday.

In another sign of strength, Aphria hasn’t reported any COVID-related layoffs so far. Simon noted that the company is even hiring for certain operational roles. Competitors such as Canopy Growth (NYSE: CGC) and Aurora have cut their workforces.

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