The Back Story. Cannabis stocks are a volatile bunch, as is Alberta-based Aurora, but the good news has outweighed the back in 2019. The companys acquisition of Whistler Medical Marijuana drew cheers in January, as did its earnings in February. Aurora is riding a wave of enthusiasm on Wall Street, as investors and other consumer staples companies rush to get exposure to the market for legal marijuana. The road to legalization may be a longer, more winding one in the U.S. than in Canada, but analysts are optimistic about Auroras outlook. Last Wednesday, Azer named Aurora her top pick in the Cannabis space. The stock popped double digits that day on the news, and then proceeded to rise another 14% through Thursdays close.
Whats New. A big chunk of Auroras recent rally comes from news earlier this week that Nelson Peltz is joining the company as a strategic advisor. As Barrons reported, Peltz will work with Aurora to explore potential partnerships that would be the optimal strategic fit for successful entry into each of Auroras contemplated market segments and advise on its global expansion.
Azer spoke with Auroras Chief Corporate Officer Cam Battley following the news, and writes that Peltz should help open a number of doors for ACB as they develop their next legs of growth. Battley told her that the billionaire had been providing the company with advice for months informally, and Azer does not see this as an activist coming in to change the existing business model, but rather to help accelerate performance. Given Peltzs vast Rolodex of contacts…Aurora believes that they have an ally who will be able to provide counsel on strategic partnerships, including partner selection, timing and structure.
Looking Ahead. Azer was upbeat on Aurora before the news, calling it not only her No. 1 pick in cannabis, but also her third favorite idea in all her coverage. Yet she thinks the alliance will bear even more fruit. She reiterated an Outperform rating and $14 price target on the Canadian shares.
She notes that Aurora has taken a more patient approach to partnership selection, aided by Peltzs counsel, and she expects the company to make at least one partnership during 2019, which may or may not be an equity investment similar to the Altria Group (MO)/ Cronos Group (CRON) combination, or the deal between Constellation Brands (STZ) and Canopy Growth (CGC).
It is worth noting, however, that Landry’s estimates for this year are unchanged. In 2019, the analyst is forecasting sales of $324.5 million and adjusted EBITDA of negative $99 million. It’s only next year, in 2020, that the analyst believes we will begin to see positive EBITDA numbers coming out of Aurora –positive $99 million.
Azer also believes that the company and Peltz share a strategy of not offering shares too early in their growth; that reflects a confidence in the growth trajectory and should result in a higher valuation. She also thinks that the structure of Peltzs compensation—his options for 20 million shares vest over four years, with various incentives—bodes well, and the arrangement is a win-win for both parties.
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Enthusiasm for marijuana stocks is at an all-time high, and that buzz has enabled Aurora Cannabis (NYSE:ACB) to expand operations at a mind-bending pace. As a result, the marijuana producer has a large share of the Canadian market for legal cannabis, rapidly expanding international operations, and a billionaire activist investor on the payroll.
Aurora Cannabis will soon be able to grow 700,000 kilograms of marijuana annually at a per-gram price that its big-name competitors cant match. Hiring billionaire-activist Nelson Peltz as a senior advisor could inspire Coca-Cola to return to the deal table or another fortune 500 company to take a chance.
Peltz has a lot of experience as a director of international companies with operations that span the globe, and Auroras eager to convince at least one of them to take a large stake in the company. You may remember, Canopy Growth received $4.2 billion from Constellation Brands in return for 38% of Canopys shares. More recently, Altria scooped up 45% of Cronos Group for $1.8 billion.
Auroras eponymous brand of medical-cannabis products are relatively popular in Canada, thanks to the right combination of low pricing and fairly consistent quality. Recently, Aurora acquired Whistler Medical, which gives the company a high-margin luxury brand thats well-loved by a smaller number of patients who can afford it.
Aurora can produce half a million kilograms of cannabis per year, and production could exceed 700,000 kgs in 2020. Auroras fancy automated greenhouses have lower labor costs than most of its peers, which could give the company a long-term advantage in a market thats getting crowded.
If Nelson Peltz were in control of Auroras Board of Directors, theres one overarching change he would probably make — and thats to end a growth-at-any-cost strategy thats created an endless string of investments made with money the company doesnt have. Whistler Medical was probably a wise addition, but spending heavily to build operations in 24 countries across five continents in a few short years probably wont work out for long-term investors dipping their toes into Aurora right now.
Although the stock has soared 1,940% over the past three years, its market cap has risen 15,840% over the same time frame to a whopping $9.07 billion. Producing a similar return from recent prices would require the companys market cap to reach at least $175 billion in a few short years, which would make Aurora around twice as valuable as General Electric is today.
Aurora finished 2018 with $205 million in cash and securities, which means another capital raise is right around the corner unless demand for legal cannabis skyrockets in the first quarter while prices either stay level or improve.
A Rolodex full of potential new partners and an air of dignity are the key reasons Auroras willing to pay Peltz up to 620 million Canadian dollars for advisory services. So far, though, the activist and the fund he manages havent disclosed any investment in Aurora Cannabis beyond Peltzs time and reputation.
Activist investors all follow the same basic formula that involves buying stocks that are underperforming and trying to raise them in ways their associated management teams dont agree with. Without any shares to vote, Peltz isnt going to stop Aurora from making extremely risky investments.
Auroras taken what looks like a strong position in new markets trying to get their government-run medical-marijuana programs off the ground. While Germany tends to pay a much higher cost per gram, its also the strictest EU member when it comes to cannabis. Prosecutors generally cant charge anyone with possession of less than 7.5 grams, and anyone can grow it for personal use, as well. In Spain, youre allowed to grow cannabis on private property as long as its to be consumed by adults in private, which has given rise to dozens of non-profit Cannabis Social Clubs that function as marijuana shops.
Stock-market enthusiasm knows no bounds, but the odds of Aurora getting big enough to provide outstanding gains from its current starting point are slim. Sales, general, and administrative costs reached CA$66.3 million during the last three months of 2018; during that time, the company reported a gross profit of just CA$32 million. With Social Clubs and their counterparts throughout the EU operating with less concern than Canadas illicit market, its going to be hard to maintain wide profit margins on medical marijuana in the region.
During the last three months of 2018, Aurora reported a net loss of CA$240 million and a comprehensive loss of CA$405 million once you account for fluctuating prices of other marijuana stocks that it owns. In Auroras domestic market, cannabis prices are contracting and Aurora can only trim so much from cost of sales per gram that reached CA$2.60 during the last three months of 2018. That means investors can expect further losses ahead.