Since Joe Biden was elected U.S. president on November 3, Canadian cannabis stocks have experienced a renaissance. Investors have taken it as a sign that federal marijuana reform in the U.S. is on the menu, and could spell opportunity for the Canadian LPs looking to gain a foothold in the lucrative market south of the border.
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The uptick has been felt across the board. Aphria (APHA) shares have enjoyed the renewed optimism, too, with shares rising 65% since the election date.
However, in contrast to several other Canadian names whose valuation has increased without necessarily displaying a change in fundamentals, Jefferies analyst Owen Bennett believes Aphria’s value proposition is steadily growing.
“If you want to get comfortable investing in a company, then it clearly needs to deliver in its core market first,” Bennett noted. Aphria fits the bill. With a 14% market share, the company holds the top spot in Canada.
Importantly, Bennett adds, “it is taking share across all price points and not just discount like many peers,” while its 50%+ cannabis gross margins (ex-bulk) are “peer best.” Add into the mix 6 consecutive quarters of positive EBITDA and you understand what Bennett is getting at.
While these are all positive developments, Bennett argues that what Aphria has been lacking in “long term value, was US optionality.”
However, it has now addressed this problem. Aphria recently acquired US craft beer company Sweetwater in a deal worth $300 million.
Bennett believes there are two core reasons why taking over a non-cannabis asset is a good idea.
“One,” the analyst said, “It allows brand awareness to be built ahead of any legal change, and via a broader array of channels as using a federally legal product, and what’s more, a profitable product so protecting returns. Two, it creates a moat around a broader CPG brand that can be leveraged into cannabis, thus limiting the ingredient provider risk. We would expect Aphria to follow this up with similar moves, into other CPG categories such as food, beauty, sports nutrition, nicotine vape etc.”
As a result, Bennett rates APHA a Buy along with a C$12.8 (US$10) price target. This figure represents upside potential of 21% from current levels. (To watch Bennett’s track record, click here)
Overall, Aphria qualifies with a Strong Buy consensus rating based on Buys only – 6, in fact. However, the recent surge has pushed the stock price close to the average price target of C$10.83 ($8.47). (See Aphria stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
