Benzinga | Jul 27, 2020 12:22PM EDT

Cantor Fitzgerald Raises Aphria Target: 'Our Top Pick Among Canadian LPs'

Aphria Inc. (NASDAQ:APHA) shares traded higher by 9.2% on Monday ahead of the company's fiscal fourth-quarter results expected out on Wednesday.

One Wall Street analyst raised his price target for the stock on Monday ahead of the big report.

The Analyst

Cantor Fitzgerald analyst Pablo Zuanic reiterated his Overweight rating for Aphria and raised his price target from CA$10.50 (US$7.84) to CA$11 (US$8.21).

The Thesis

Aphria continues to be Zuanic's top stock pick among Canadian cannabis producers. He said the company is gaining recreational market share in Canada and will likely beat consensus fourth-quarter sales estimates by roughly $2.24 million.

Zuanic is also projecting 25% sequential recreational cannabis sales growth compared to just 20% sequential sales growth for the overall recreational market.

"We think LPs like APHA, with positive EBITDA, consistent domestic rec/med market share gains, and which are sensibly building businesses overseas (MJ reg issues notwithstanding, we should remember 95% of the world's population lives outside NA, and we still think MJ deregulation will be a global phenomenon), will outperform," Zuanic wrote on Monday.

Unfortunately, Aphria investors should keep their expectations muted when it comes to profitability in the fourth quarter, Zuanic added. He said COVID-19 operating disruptions during the quarter likely weighed on cannabis EBITDA margins.

In addition, Zuanic is calling for cash burn to improve sequentially from C$91 million in the third quarter to just C$34 million in the fourth quarter. Zuanic is also projecting net cash of C$128 million.

In the longer-term Zuanic says Aphria should benefit from the Canadian cannabis market expanding from $1.6 billion in 2019 to $6.2 billion by 2024. Cantor is also projecting the US cannabis market will grow from $12 billion in 2019 to $31 billion by 2024.

Benzinga's Take

Given all the uncertainty that remains in the cannabis space in the near-term, it may be wise for cannabis bulls to take a diversified approach to investing.

Consider buying a basket of Canadian legal producers like Aphria as well as US multi-state operators that have high-quality balance sheets and leading market shares.

Related Links:Stifel Upgrades Aphria: 'Fundamental Performance Will Drive A Re-Rating' What A Biden Presidency Would Mean For Cannabis Stocks