Shares of Organigram Were Upgraded After Reporting Better Than Expected Q1 Earnings
Aphria Saw its Price Target Slashed in Response to its Second Quarter Financials
Two of Canada’s premier licensed cannabis producers released quarterly earnings this week. On Tuesday, Aphria (TSX: APHA) (NYSE: APHA) (FRA: 10E) reported earnings for Q2 2020 while Organigram Holdings (TSX: OGI) (NASDAQ: OGI) (FRA: 0OG) released its first-quarter 2020 financial results.
Within days of the OGI and APHA earnings reports, two of the cannabis industry’s top analysts have made adjustments to their research coverage on both companies.
As we predicted in yesterday’s Organigram article (although quicker than anticipated), Raymond James analyst Rahul Sarugaser has officially upgraded shares of OGI stock to reflect the company’s strong Q1 earnings. In his update to clients on Wednesday, Sarugaser Upgraded OGI stock from ‘Market Perform 3’ to ‘Outperform’.
The upgrade came a day after Organigram posted a 102% increase in Q1 2020 net revenue growing from $12.4 million recorded in Q1 2019 to $25.2 million. The company easily beat the street’s consensus top-line estimate of $19.5 million.
“As we noted in our 4Q19 earnings note, we described our prediction that ‘The Worst is Over’ for OGI. With these 1Q20 results, we reaffirm this prediction,” said Sarugaser.
The Raymond James analyst Maintained his $9 per share Price Target on shares of Organigram’s stock. Even with OGI’s huge breakout and confirmed technical reversal this week, Organigram’s stock still offers investors an implied upside of +104.08% as of Thursday’s closing price of $4.41.
“Given the headwinds, we see facing the cannabis market — in particular, limited retail outlets and crashing wholesale cannabis prices—we anticipated a difficult 1H20 for OGI, motivating us to reduce our revenue estimates and our rating to Market Perform (maintained target price at $9.00). We are pleasantly surprised to see OGI beat our estimates, as well as the street’s; OGI has successfully sidestepped industry roadblocks that some of its peers have met, violently, head-on,” added Sarugaser.
OGI shareholders and prospective investors will be happy to know that Sarugaser believes “the worst is over” for Organigram. The analyst is optimistic about the company’s Cannabis 2.0 sales as well as its new product formats and the potential to dramatically increase its retail cannabis store count in multiple provinces across Canada.
Shares of OGI experienced a huge reversal and breakout this week fueled by the earnings beat. The large move off the bottom was also caused by a technical event called Bullish Divergence which is used to identify a shift in momentum from the ‘Bears’ to the ‘Bulls’ and confirm the reversal of a downtrend.
OGI stock skyrocketed as much as 68.68% over the past 2 trading sessions. If you’d like additional info on Bullish Divergence and how to spot it, check out Wednesday’s OGI article here.
APHA Price Target Lowered
Jason Zandberg of PI Financial also provided his clients with a research update this week on shares of Aphria following the release of the company’s Q2 2020 earnings. Although Aphria experienced a 457% growth in year over year net revenue, the company posted a net loss of $7.9 million or $0.03 per share for the second quarter of 2020. Aphria also lowered its fiscal 2020 guidance on net revenue and adjusted EBITDA.
“Overall cannabis sales were $39.8 million less $6.1 million in excise taxes for net revenue of $33.7 million. Medical revenue was flat compared to Q1 at $10.1 million. All the growth for cannabis sales was within the recreational sales as rec revenue was up 45% to $29 million. This growth was impressive and APHA holds the #1 market share position for pre-roll, oil and capsules in Ontario, PEI and Nova Scotia. European distribution continues to struggle. This is the second straight quarter of disappointing distribution sales and again management indicated that the disruption in the German government reimbursement model was to blame,” stated Zandberg.
In his update, the PI Financial analyst Maintained his ‘Buy’ rating on shares of APHA stock but as a result of the company’s Q2 earnings, Zandberg decreased his Price Target on Aphria’s stock from $9 to $8 per share. With shares of APHA closing Thursday’s trading session at $6.77 per share, there is still an implied upside of +18.17% from these levels.
“We are maintaining our BUY rating (risk: SPECULATIVE) but reducing our target to $8.00 (previously $9.00) for Aphria Inc. (T-APHA). Our target price is based on a 16x EBITDA multiple on its cannabis operations and a 5x EBITDA multiple on its distribution business. The overall EBITDA multiple on our target is 13x FY21 EBITDA. Canadian cannabis peers trade at an average of 18x FY21 EBITDA,” added Zandberg.
Zandberg expects Aphria’s numbers to improve moving forward with the analyst projecting fiscal 2020 revenue of $577.7 million and EBITDA of $37.4 million. In fiscal 2021, he expects Aphria to post even better financials which include projected EBITDA of $150.2 million on revenue of $878.2 million.
On a technical analysis level, we reported in our previous Aphria article that APHA stock is currently in the process of potentially completing an Inverse Head and Shoulders bottom reversal chart pattern. This is the same reversal pattern that Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1) exploded out of on Monday gaining 26% during a three-day breakout.
Certain chart patterns have formulas that allow investors to calculate price targets that are based on the stock’s technicals rather than fundamentals. In the case of Aphria and its Inverse Head and Shoulders pattern, there is a very simple and reliable formula to calculate the stock’s short term price target. See the formula, price target and APHA chart below.
Price Target Formula: Neckline (N) – Head (H) + Neckline (N) = Price Target (PT)
- Neckline = $7.42
- Head = $4.95
- $7.42 (N) – $4.95 (H) + $7.42 (N) = $9.89 (PT)
For more details on the Inverse Head and Shoulders pattern and the price target formula read our January 13, 2020 article here.
Disclosure: The Cannabis Investor does not hold a position in any of the stocks mentioned in this article.