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During the last month, several leading Canadian cannabis companies have reported quarterly financial results and the market has been responding negatively to these numbers (on average). Although these companies have reported strong growth when compared to prior periods, the numbers have come in below expectations and the market has punished these companies for such results.

In 2014, we started covering the cannabis industry and are impressed with the way the sector has evolved since then. Going forward, we believe that the cannabis industry is well positioned to record strong growth and will continue to closely monitor companies that are going to benefit from this.

Today, we want to highlight 3 Canadian cannabis producers that have recently reported quarterly earnings. Going forward, we believe that these operators are well positioned to capitalize on the burgeoning global cannabis industry and are of the opinion that these companies are worth watching.

Aleafia Health: A Growth Story that is Trading at a Discount

Earlier this month, Aleafia Health (ALEF.TO) (ALEAF) reported third quarter financial results and recorded a net profit during the period. This was the first profitable quarter for the business and the market responded favorably to the results. After initially bouncing higher, Aleafia Health came under pressure and this was primarily the result of weak earnings from Canopy Growth Corp and Aurora Cannabis (which we will discuss in detail later in the article).

2019 has proved to be a major year for Aleafia Health and the year was highlighted by the acquisition of Emblem, a leading Canadian cannabis producer. This acquisition has already proved to be accretive and we are bullish on the growth prospects associated with the asset in 2020 and beyond. We believe that the market does not fully appreciate the Aleafia Health opportunity and we are favorable on the path the management team is taking the business. With a strong balance sheet and a focus on profitability, there is a lot to be excited about when it comes to Aleafia Health and we will monitor how the story continues to advance.

Earlier this month, Emblem reported to have secured two Health Canada license amendments to expand processing capacity and to allow for the sale of new product formats at its Paris processing facility. The amendments apply to the licensed and operational Paris location which processes all of the company’s extraction, packaging and order fulfilment for Canadian and international sales. As a result of the license amendments, Aleafia Health is now authorized to produce and sell new product formats and has adequate, licensed production space to do so. This represents a substantial opportunity for the business and we will monitor how the team executes on this.

The first license amendment greatly increases Aleafia Health’s ability to produce finished cannabis products by authorizing activities including extraction, packaging and labeling in four rooms that were previously only authorized for cannabis cultivation. The amendment doubles the amount of licensed processing space at the facility and we are favorable on the amount of revenue that can be generated through this.

The second license amendment allows Aleafia Health should produce and sell edibles, topicals and extracts to the Canadian market. Going forward, we expect the cannabis 2.0 vertical to be a major revenue generating opportunity for Aleafia Health and we will monitor the process of getting these products to market.

Going forward, we expect the Paris facility to have a significant impact on Aleafia Health’s growth profile as it will enhance the companies leverage to the cannabis 2.0 opportunity in Canada. The 30,000 sq. ft. facility is entirely dedicated to the extraction, production, packaging and distribution of high-margin, value-added cannabis health and wellness products. The facility is purpose-built to meet European Union Good Manufacturing Practices (EU-GMP) certification requirements and we find to this to be of the utmost importance. Through a EU-GMP certified facility, Aleafia Health will be able to start exporting medical cannabis products to the European Union (EU) market and we expect this to prove to be a major value driver for the business.

Although the recent trend for Aleafia Health has been to the downside, the company has been executing on all cylinders and we find the risk-reward profile to be attractive at current levels. Aleafia Health has substantial catalysts for growth, and we believe that the market does not fully appreciate this. Over the next year, we expect to see Aleafia Health report substantial growth from an indoor and outdoor cultivation standpoint. At current levels, the Canadian cannabis producer is trading at a substantial discount to its peers and we will be closely following the opportunity on a going-forward basis.

Canopy Growth: Trading at Multi-Year Lows

A few weeks ago, Canopy Growth (WEED.TO) (CGC) plunged lower after it reported quarterly financial results that came in below expectations. The company reported a much larger net loss than expected and revenue also came in below expectations. The market punished the stock for the miss and this has put pressure on the entire sector.

Canopy Growth reported to have ended the quarter with $2.7 billion of cash and cash equivalents and marketable securities available for sale. This leaves the company well positioned to take advantage of organic and inorganic growth opportunities and we will monitor how the management team is able to drive the story forward.

During the quarter, Canopy Growth reported a more than $100 million net loss on $118 million of revenue (this amount represents consolidated growth revenues). The management team expects to see revenues improve once additional retail stores open and new products are approved to be sold by Health Canada. We believe that Canopy Growth has attractive leverage to the Canadian and the international cannabis opportunity and will monitor how the management team continues to execute from here.

From a fundamentals standpoint, Canopy Growth has reported substantial improvements on a quarter-over-quarter basis. Although the company has been executing at a high level, the market expected better results, especially due to the valuation of the operation, and we will be keeping an eye on how the trend changes from here.

When looking at Canopy Growth, we find the strength of the balance sheet to be the most important part of the story. The relationship that the company has with Constellation Brands puts the business in a league of its owns and we will monitor how the relationship continues to evolve.

During the last month, Canopy Growth has been under considerable pressure and is trading at lows it has not seen in a long time. We are monitoring the trend from here and will be keeping an eye on how the story continues to advance. We believe that Canopy Growth is an industry leader, and this is an opportunity to be watching.

Aurora Cannabis: Trending Lower and Worth Watching

Although, Aurora Cannabis Inc. (ACB.TO) (ACB) was at one time considered to be a darling of the cannabis industry, the shine has begun to fade as the operation has been slow to advance. While the company has a leading position in Canada and in international markets, Aurora recently reported quarterly financial results that came in lower than expectations and the market punished the stock for this.

One of the most important metrics reported by the Canadian cannabis producer during the quarter is related to the cost per gram. In the first quarter, the company reported to have produced cannabis for $0.85 per gram. This is substantially lower than prior quarters and we found this to be significant.

In the current quarter, Aurora Cannabis announced that it has made several decisions designed to streamline its operations, provide financial flexibility and reduce financial leverage in response to a changing market and regulatory environment while supporting long-term growth. We will monitor how the management team is able to execute on this initiative as we expect it to play an important role in the company’s focus on a path to profitability.

One of the most significant concerns as it relates to Aurora Cannabis pertains to the strength of the balance sheet. The Canadian cannabis producer has divested of major investments in an effort to raise cash in a non-dilutive manner and we will monitor this trend. The decision to sell off several investments is worth noting as it represents a change in strategy.

Going forward, Aurora Cannabis is well positioned to capitalize on the changing landscape of the Canadian cannabis industry. The company has been highly focused on the cannabis 2.0 opportunity and we will monitor how the management team is able to execute on this. From cannabis concentrates to cannabis infused products, Aurora Cannabis is well positioned to capitalize on the smokeless product market, and this is something to watch.

During the last few months, Aurora Cannabis has come under considerable pressure and we will continue to monitor the opportunity. The recent decline has caught our attention and we will monitor the trend on a going forward basis. With momentum pointing to the downside, we are being patient with Aurora Cannabis and will watch how the story advances as we head into 2020.

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