Aphria (NASDAQ:APHA) stock is facing a challenging period following its third quarter earnings disappointment.
Aphria announced fiscal year 2021 third quarter financial results on April 12. The news was bad, and as a result share prices plunged. Next, on April 14, Aphria will hold a special meeting for shareholders to approve the Aphria-Tilray (NASDAQ:TLRY) merger.
While the merger is promising, an investment into the merged companies isn’t totally clear cut.
APHA Stock: Q3 Follows Strong Q2
Aphria had a record Q2 from a top-line perspective: gross revenues for adult-use cannabis hit $72.1 million CAD, up 149% from 2019 quarter-over-over. This report marked the seventh straight quarter in which Aphria increased revenue.
Net revenues hit $160.5 million CAD for the quarter. APHA stock climbed in the weeks following the positive news. Analysts were optimistic that Aphria’s Q3 earnings reports would show increased revenues in the following quarter.
Unfortunately, analyst expectations of Aphria were not met when the earnings came out.
Prior to the Q3 earnings release seven analysts with coverage of Aphria had given revenue guidance for Aphria. They had however revised their revenue estimates for Q3 downward since the beginning of the year. The downgrades would prove appropriate, however they would prove inaccurate. The analysts’ mean estimate began at $175.58 million CAD, and dropped to $170.66 million CAD prior to April 12.
Likewise, those same analysts had revised EBITDA estimates downward.
On April 12, Aphria’s earnings report showed that Aphria hit a meager $153.6 million CAD. That figure was far below even the downgraded analyst projections. The markets were not interested in management’s explanations for the miss, and share prices immediately dropped.
Upcoming Merger
Aphria and Tilray are Canadian cannabis CPG companies. The obvious benefit of the merger is its complementary nature. The combination increases the scale and scope of the merged companies’ business. The combined company will boast an end-to-end supply chain. The pandemic has reiterated the importance of strong supply chains, so that’s a positive.
But the company is really aimed at the U.S. market and aspires to establish a dominant footprint there. While the regulatory framework is opening on a state-by-state basis, Aphria and Tilray are more concerned with the federal repeal. That federal repeal of cannabis is a complex one. A ballot shows that, while 68% of Americans support making marijuana legal, and 90% support medical marijuana, the political implications on a federal level aren’t so clear.
The merged company is very much at the mercy of this ongoing saga. One thing is clear though: the speed of cannabis adoption and the profitability flowing from such companies has been slower than hoped.
That will continue to affect these two firms and the proposed merger. Investors want to know what the net benefit of the combination is. There is good news there.
Business Accretion Expectations
Aphria seems to be trustworthy in regards to the due diligence it undertook in evaluating the proposed Aphria-Tilray merger. Back in January, when Aphria released its Q2 financial results, it gave guidance regarding the accretion value of the merger. The company stated that the closing of the Tilray business combination will generate value, including our over $100 million CAD anticipated pre-tax synergies.
This guidance was independently verified on April 5. Independent Proxy Advisory firm ISS confirmed the numbers: “The strategic rationale appears sound as the proposed transaction will improve the scale and footprint of the combined entity. Importantly, the combined company is anticipated to deliver US$78 million (C$100 million) of pre-tax cost synergies across several areas.”
This is a minor detail, but the overall thrust is two-fold. Aphria doesn’t look to have been blowing smoke, and the merger does indeed increase value.
APHA Stock: The Takeaway
There are too many variables to consider to invest in APHA stock right now. The U.S. market that the combined company seeks to capitalize on remains fractured. I think the stock is a sell, as cannabis news continues to disappoint overall, and Aphria’s Q3 earnings reiterate larger concerns.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”