By Ciara Linnane, MarketWatch
Aphria Inc., was skidding nearly 8% Wednesday to pace decliners in the cannabis sector, a day after it reported earnings for its fiscal first quarter that showed a profit that was mostly due to paper gains.
The stock /zigman2/quotes/207425803/composite APHA -6.11% /zigman2/quotes/205566616/delayed CA:APHA -5.58% surrendered part of Tuesday’s 24% gain even as analysts weighing in on the numbers took a bullish stance. Aphria posted net income of C$16.4 million on sales of C$126.1 million, but the profit came from a change in the value of its convertible debt after a steep decline in its share price, among other factors, which is down 66% in the last 12 months.
A change in the accounting methods used to value its investment in Althea Group Holdings Ltd., allowed management to book a profit of C$24.3 million, as MarketWatch’s Max A. Cherney reported.
GMP analyst Justin Keywood reiterated his buy rating on Aphria stock on the news and said it remains on GMP’s Best Ideas list.
“Given the recent broader sector correction and indications of industry transition pain, we view Aphria’s Q1 results as solid,” he wrote in a note to clients. “The results are also consistent with our recent scuttlebutt, including that Aphria has greatly improved in how it operates, along with good customer pull-through for its brands.”
Aurora Cannabis /zigman2/quotes/210559470/composite ACB -0.56% /zigman2/quotes/203734337/delayed CA:ACB -0.42% stock fell 2.7%, even after it was tipped to be a possible long-term winner as one of three major cannabis companies expected to be still standing at the end of the next decade. The investor site, The Motley Fool , said if Aurora can survive its current financial challenges and structural problems in the Canadian market, it may end up with Constellation Brands /zigman2/quotes/207737284/composite STZ +0.10% and Altria /zigman2/quotes/208895754/composite MO -0.36% in that category.
Aurora has not sold a stake in itself to a big beverages or tobacco company, as rival Canopy Growth has (to Constellation Brands) and Cronos has (to Altria). If it can withstand pressures that include the pending maturity of convertible bonds that will be hard to service, a stock price that has fallen 66% in the last 12 months and a weakened balance sheet, the company could be among the list of three, said the site, which expects Constellation and Altria to fully take over their partners over time.
Flowr Corp.’s U.S.-listed stock /zigman2/quotes/205237089/delayed FLWPF -3.32% /zigman2/quotes/206895064/delayed CA:FLWR -2.73% rose 3.9% after MKM Partners analyst Bill Kirk initiated coverage with a buy rating and C$4.00 price target that is about double its current price. Kirk said the company stands out from the Canadian crowd thanks to its focus on Europe.
“We believe growing at an EU GMP certified facility in Portugal (expected before year-end) will put Flowr at an advantage to those trying to export from Canada to Europe, and even the growers in South America,” Kirk wrote in a note to clients.
Portugal offers a better climate for cannabis growing than Canada, and has a cheaper labor force and lower transportation costs, he wrote. The analyst estimates that Toronto-based Flowr can save 50% of costs by operating in Portugal and possibly even achieve parity with growers in Columbia.
“This should give Flowr a distinct advantage to capture share in the EU, which presents an opportunity more than 10x the size of Canada. Within Canada, Flowr is focused on high-end product, which offers a non-commoditized niche opportunity,” said Kirk.