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Will Shareholders Gain on Rumors in Spite of News?

NYSE listing rumors may overshadow this company’s most recent earnings report in the markets.

Photo by Martin Ceralde for unsplash

Q1 results for Aphria Inc.’s (TSX: APH) 2019 fiscal year had some surprises in store, and the company’s stock fell 3 percent on Friday amidst a post-legalization-day rally in the sector. However, a catalyst on the horizon may eclipse that news.

A week of product lost

The company lost an entire week’s worth of crops last quarter – that’s 7% of their gross margin. But will that be enough to drag the stock down in light of NYSE listing rumors?

Aphria Inc. had some great news this quarter. Compared to last quarter, the company reported 10 percent revenue growth at $13.2 million. That’s a 117 percent increase from the same quarter the previous year.

The revenue growth came after Aphria acquired Broken Coast in February 2018. The company also reported a massive jump in grams sold, as their wholesale numbers increased from 32,452 grams to 312,022. This was due to efforts to sell off strains the provinces didn’t order in the run-up to legalization.

Aphria’s stock was also aglow following rumors that Altria (MO) – maker of Marlboro – intended to invest.

Lacking employees at Aphria greenhouses

However, operational issues reported in 2019’s first quarter are hurting Aphria’s stock. Reacting to possible mismanagement this quarter, investors sold the stock down 3 percent in Friday trading. Without enough qualified workers at its greenhouses, the company had to destroy one week’s crop. That’s 13,642 plants destroyed due to insufficient labor.

The company ramped up hiring, and plans to fully automate, but not for a few quarters. Further, they’re having issues scaling due to differing provincial systems and the dreaded excise tax stamp problem – read more about that here.

Core businesses have room to improve

Aphria’s net income from core business was negative $1.4 million. Nevertheless, it is well capitalized to expand. With over $313 million in cash and equivalents in the bank, the company has flexibility. Plans for the money include building a new extraction center after months of licensing-related delays and greenhouse expansions.

Questions of scalability

However, if the company had issues producing 30,000 kg, will it be able to ramp up to 255,000 kilograms without hiccups? While a legitimate concern, another catalyst may eclipse Aphria’s efficiency anxieties.

An NYSE listing will be a boon for share price

This week, Aphria announced it would seek a listing on the New York Stock Exchange. Canada’s third-largest marijuana company is currently only available in the U.S. on the over-the-counter market. Listing on Wall Street’s big board follows in the steps of marijuana mothership Canopy Growth (NYSE: CGC) and Aurora Cannabis (TSX: ACB), which begins trading on the NYSE on Oct. 23. Both of those stocks got a big-board bump in share price, and the same could happen for Aphria.

Due to federal laws barring cannabis in the U.S., the marijuana market there remains disjointed and with few investment-worthy stocks for investors to buy. Canadian pot stocks trade on Canada’s major exchanges including the Toronto Stock Exchange (TSX) and its small-cap equivalent, the TSX Venture Exchange. Most U.S. pot stocks trade over-the-counter, which is a lightly regulated exchange and has been prone to hosting fraudulent companies.

Trading on Canadian exchanges, however, can require special approvals from brokerages, and cost more to investors in commissions. Moreover, institutional investors such as pensions and mutual funds follow guidelines and investment mandates that can disallow OTC and foreign-exchange traded funds. Listing on the NYSE thus gives Aphria the opportunity to pull from a larger funding pool.

Since listing on the NYSE, Canopy Growth’s share price doubled, and its trading volume increased markedly from 1.1 million when it traded OTC to 9.3 million on NYSE.

A share price gain post-NYSE listing may be quite legitimate.

Written by Rob McLean

Rob loves staying on top of developments in the cannabis sector, and always has his finger on the pulse of real estate markets.

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