The market is indeed very upbeat about marijuana legalization now that the Democrats have taken control of the Senate. The cannabis sector has gained immense momentum since then. Hopes of decriminalization of marijuana will lead to its wider adoption in more regions of the United States. With developments like this, the industry players are poised to gain significantly. Thus, investors are eager to add cannabis stocks to their portfolio.
However, not all cannabis companies have the strength to perform well in the long-run. Due to operational inefficiencies, prolonged periods of losses, and lack of product innovation, many pot producers have become risky propositions. Some of them are also suffering from a high cash burn rate.
Aphria Inc. (APHA), Organigram Holdings Inc. (OGI), and Cresco Labs Inc. (CRLBF) are three such companies with an uncertain future. APHA and OGI have demonstrated continuous losses and operational weakness. While CRLBF has better financials, it still has to prove its strength in the current phase of market volatility and maintain its cash position. Thus, investors should steer clear of these stocks at this juncture.
Aphria Inc (APHA)
APHA is involved in the cultivation, processing, production, as well as commercialization of medical cannabis in Canada and globally. The company also sells pharmaceutical-grade medical cannabis, adult-use cannabis, and cannabis-derived extracts under its brands Solei, RIFF, Good Supply, Aphria, and Broken Coast.
During the second quarter ended November 30, 2020, APHA’s revenue increased 33.1% year-over-year to C$160.5 million. Loss per share widened to C$0.42 from C$0.03 posted in the prior-year period.
In terms of revenue also, the growth was subdued in North America. APHA’s retail cannabis sale also trailed the marijuana sales growth in Canada during September and October. This is a warning sign which indicates that it is losing its foothold on the home front. It is now looking at Europe for diversification and relying heavily on German sales. Another cause of concern is the contraction of its gross margin to 27.3% from 29.7% posted in the previous quarter. As the company is merging with Tilray, it is even more critical for the combined entity to break even. APHA’s shrinking gross margin at this point won’t help.
Analysts expect revenue for the quarter ending February 28, 2021, to be $139.4 million, indicating a 27.1% year-over-year growth. Loss per share for the quarter is likely to be $0.02.
APHA also has a stretched valuation now. In terms of Price/Sales, it is currently trading at 10.13x which is much higher than the industry average of 9.04x.
APHA rallied 312.2% during the past year to close Friday’s trading session at $16.94. Over the past six months, the stock rallied 275.6%.
APHA’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree.
APHA has a grade of D for Growth, Value and Stability, and an F Grade for Sentiment and Quality. Out of the 240 stocks in the D-rated Medical – Pharmaceuticals industry, it is ranked #239.
In addition to the POWR Ratings grades I’ve just highlighted, you can see APHA’s ratings for Momentum, here.
Organigram Holdings Inc. (OGI)
OGI deals with the production and selling of cannabis and cannabis-derived products in Canada. Through its Edison Reserve, Edison Cannabis Co., ANKR Organics, and Trailblazer brands the company offers cannabis flowers, extracts, edibles and oils, beverages, and other cannabis products. OGI also offers vaporizers for the medical marijuana market.
During the first quarter ended November 30, 2020, OGI’s net revenue decreased 23% over the year to $19.3 million. The revenue was weighed down by the substantially lower wholesale revenue from licensed producers and a lower average selling price. Loss per share widened to $0.17 from $0.01 posted in the same period last year.
The company is also grappling with high production costs due to diseconomies of scale. Its production during the quarter was significantly low as there was unabsorbed fixed overhead. The company’s balance sheet doesn’t look healthy either. The current portion of its long-term debt surged 427% at the end of the quarter.
Though OGI has begun to revamp its production to lower its losses, its future looks uncertain. As a part of its product portfolio revitalization, it has launched 53 new stock-keeping units (SKUs) since July 2020. It is also focussing on the high-margin Edison dried flower offerings. However, it remains to be seen if there is enough demand for these products to see visible revenue growth.
The consensus revenue estimate for the quarter ending February 28, 2021, is $16.6 million, indicating a 4.3% decrease year-over-year. Meanwhile, loss per share is likely to expand to $0.03.
The stock is also quite overvalued considering its financials. Its forward Price/Sales of 11.86x compares to the industry average of 9.87x.
Over the past year, OGI surged 69.7% to end Friday’s trading session at $3.75. Over the past six months, the stock has rallied 177.8%.
OGI’s dismal prospects are also apparent in its POWR Ratings. The stock has an overall rating of F which translates to a Strong Sell in our proprietary rating system. OGI also has an F rating for Value, Quality, and Sentiment. In the D-rated Medical – Pharmaceuticals industry, it is ranked #240.
Click here to see the additional POWR Ratings for OGI (Momentum, Growth, and Stability)
Cresco Labs Inc. (CRLBF)
CRLBF is involved in the cultivation, manufacturing, and selling of medical cannabis and related products in the United States. The company’s Cresco and Reserve brands offer cannabis in flowers, live concentrates, and liquid live resins. Similarly, soft gels, tinctures, and lotions are offered under the Remedi brand. CRLBF’s Mindy’s brand offers gummies, fruit chews, hard sweets, and chocolates.
CRLBF’s revenue during the third quarter ended September 30, 2020, climbed 63% year-over-year to $153.3 million. The revenue growth was led by rising in retail revenue due to strong sequential same-store growth and two new store openings in Illinois. The company’s adjusted EBITDA surged 182% over the quarter to $46.4 million. EPS for the quarter was $0.01.
While the financials of the company are looking strong, it has long been suffering from a high cash burn rate. CRLBF’s cash spending has been widening over the past few quarters. In the quarter ended June 30, 2020, the cash spent in operations expanded to $9.8 million from $6.1 million posted in the third quarter of 2019. The cannabis sector is going through a lot of uncertainty and CRLBF remains under pressure to maintain a strong cash position to support its growth.
Moreover, its recent acquisition of Bluma Wellness to expand in Florida brings exposure to tough competition. Major players like Curaleaf and Trulieve Cannabis already have a dominant position in Florida, and CRLBF has to face the challenge of finding its footing there.
Analysts expect CRLBF’s revenue for the quarter ended December 31, 2020, to be $161.9 million, indicating a 291.2% decline year-over-year. EPS for the full year ending December 31, 2021, is likely to be 385.7% over the year to $0.20.
CRLBF’s valuation doesn’t justify its fundamentals. Its trailing EV/EBITDA of 79.26x is much higher than the industry average of 21.27x.
CRLBF ended Friday’s trading session at $15.77 surging 203.3% over the past year. During the past six months, CRLBF climbed 123.7%.
CRLBF’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall rating of C which equates to Neutral in our proprietary rating system. It also has a D for Quality and Stability. It is ranked #139 in the Medical – Pharmaceuticals industry.
In total, we rate CRLBF on eight different levels. Beyond what we stated above we also have given CRLBF grades for Growth, Value, Sentiment, and Momentum. Get all the CRLBF ratings here.
APHA shares fell $0.13 (-0.60%) in premarket trading Wednesday. Year-to-date, APHA has gained 210.12%, versus a 4.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More…
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