Aurora Cannabis Stock Can Surge With New Partnerships, Analyst Says – Barrons

Aurora Cannabis Stock Can Surge With New Partnerships, Analyst Says - Barron\s
Why Ulta Beauty, Broadcom, and Aurora Cannabis Jumped Today
Aurora Cannabis stock (ACB) has already jumped more than 81% since the start of the year, but recent management meetings keep Cowen & Co.s Vivien Azer confident that it can keep going higher.

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.

For example, the analyst notes that Aurora faced production issues as recently as this past fall. But last month, Health Canada licensed Aurora’s “Aurora Sky” and Bradford” facilities to begin producing cannabis, growing Aurora’s annual production capacity to 150 tons per annum in the near term. Landry estimates that operated at capacity, Aurora will soon be capable of generating about $1 billion in annual sales and earning roughly $250 million per annum in earnings before interest, taxes, depreciation, and amortization (EBITDA) — not quite the 50% EBITDA margin that Aurora is targeting, but that just means there’s room for improvement. And in any case, even 25% EBITDA margins will be a big improvement over the negative 154% EBITDA margin Aurora produced in 2018.

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. 

You see, as it turns out, this news is about more than just Mr. Peltz, proper. It’s about Trian, and the fact that through Trian, Nelson Peltz has developed relationships with a whole host of consumer packaged goods companies (that Aurora might also want to partner with, providing marijuana derivatives for incorporation into other products) — companies like: PepsiCo, Dr Pepper Snapple, Procter & Gamble, Kraft Foods, Heinz, and Mondelez, “among others.” It’s in Mr. Peltz’s, and Trian’s relationships with key decision makers at these companies that have Landry thinking this could be a transformative deal for Aurora.

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.

In other news, Landry echoed Jefferies’ optimistic note (which we discussed earlier this week), regarding Aurora’s announced deal to begin selling cannabis oil into the German medical market. As GMP notes, Aurora has obtained EU certification of Good Manufacturing Practice for two facilities in the EU already (Mountain and Markham), and is now in a position to produce a total of 12 metric tons of cannabis oil annually for the European market. And elsewhere in Europe, GMP notes that Aurora also has expanded into Portugal, where it recently acquired a 51% stake in Gaia Pharm Lda, which has applied for a Portuguese production license.

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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Beyond Peltz, though, Landry sees other reasons to become incrementally more optimistic about Aurora.

Friday saw another positive session on Wall Street, with the Dow Jones Industrial Average posting triple-digit gains and other major stock indexes following suit with solid moves higher. Despite some weak numbers from government officials on the state of the manufacturing industry in the U.S., investors seemed to take heart from encouraging signs of progress on the trade front, as well as good news from some high-profile companies. Earnings were also a key driver of market sentiment. Ulta Beauty (NASDAQ:ULTA), Broadcom (NASDAQ:AVGO), and Aurora Cannabis (NYSE:ACB) were among the top performers. Heres why they did so well.

Shares of Ulta Beauty jumped 8% after the cosmetics and salon chain reported fourth-quarter financial results. Ulta said that revenue was higher by nearly 10% from the year-ago period despite having one less week, and comparable sales were up 9.4%. Stronger traffic was primarily responsible for the gains, but Ulta said that customers tended to spend slightly more as well, and the company got good traction from its e-commerce business despite the huge value of its in-store salons. With guidance for the coming year calling for double-digit sales growth and continued gains in its online business, Ultas never looked better to investors.

Broadcom saw its stock climb 8% following the release of its fiscal first-quarter financial report. The technology solutions provider said that revenue climbed 9% from year-earlier levels, and adjusted net income from continuing operations was modestly higher over the same period. Broadcom saw extreme weakness in its semiconductor solutions business, blaming slowing growth in China for some of the challenges that part of the company faces. Yet infrastructure software revenue quadrupled over the past 12 months, and CEO Hock Tan has shareholders feeling optimistic that Broadcom will be able to stay on track and ride the cyclical ups and downs in the wireless industry.

Finally, shares of Aurora Cannabis gained 7%. The Canadian cannabis company received positive comments from analysts at Cowen, who repeated their previous rating of outperform for the stock. News earlier this week that billionaire activist investor Nelson Peltz had taken on an advisory role should help Aurora move more quickly and effectively in plotting a course forward, and Auroras leadership role in cannabis production gives it an edge that only a few of its rivals can come close to matching. If Peltz can bring a high-profile partner to the table, then Aurora could look even more attractive to investors.


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