Theres a pretty good chance that 10 years from now Aurora Cannabis (NYSE:ACB) and/or Constellation Brands (NYSE:STZ) will be worth a lot more, thanks to growth in the global cannabis market. Aurora is already a top marijuana stock. Alcoholic beverage maker Constellation is sort of a marijuana stock as well by virtue of its 35% stake in Canopy Growth (NYSE:CGC).
Analyst Commends Cannabis Stock Aurora (ACB) for Peltz Pick
Both Aurora and Constellation turned in dismal performances in 2018. So far this year, though, Aurora is on fire with its share price nearly doubling, while Constellation has eked out a small gain. Which of these two stocks is the better buy now?
The investing thesis for Aurora Cannabis boils down to three assumptions. First, the legal cannabis market is going to be enormous. Second, the primary keys to success in the cannabis market are capacity, distribution channels, and low operating costs. And third, Aurora is positioned to be an industry leader in all three of those keys to success.
As for the first assumption, over 30 countries have legalized medical cannabis. In the U.S., 33 states have legalized medical cannabis, with 10 also allowing the legal use of recreational pot. Although marijuana remains illegal at the federal level, signs are increasingly pointing toward the possibility that those laws could change in the not-too-distant future. Most of the international and U.S. state marijuana markets are only in their early stages, so theres a lot of room for growth.
The second assumption appears to be reasonable as well. No company can sell a product it doesnt have, so production capacity is critical. Even if a company has ample supply, it must have outlets to which it can sell the products.
That leaves the third assumption, which also seems pretty sound. Aurora stated in its second-quarter update in February that it expects to have an annual production run rate of more than 150,000 kilograms by the end of this month. The company, however, projects to boost its capacity to over 500,000 kilograms per year by the middle of 2020. And that amount doesnt include the additional impact from Auroras acquisition of ICC Labs. In a nutshell, Aurora is clearly on track to be the No. 1 marijuana producer in the world in terms of annual production capacity.
What about distribution channels? At home in Canada, Auroras distribution network covers 98% of the countrys population. In the last quarter, Aurora captured roughly 20% of the Canadian recreational marijuana market. Aurora is also a leader in international medical marijuana markets with a leading market share in Germany and operations in 22 other countries.
Auroras operating cost structure isnt leading the industry right now. In its fiscal Q2, the companys cost per gram produced actually increased from the previous quarter. However, Aurora expects to drive its costs down by leveraging its massive scale and by using automation and improved genetic strains of cannabis.
With Constellation Brands, investors must look at the companys opportunities in its core business of marketing alcoholic beverages as well as in global cannabis markets. While many beer makers have struggled in the U.S., Constellations premium beers have succeeded, beating the overall U.S. beer market in sales growth by a double-digit percentage margin.
Constellation should enjoy even more growth from its launches of new products. In particular, momentum is likely to pick up for the companys Corona Premier, Corona Familiar, and Modelo Especial beers. Constellation President and CEO Bill Newlands said in the companys Q3 conference call in January that the launch this year of Corona Refresca flavored beers could “be over 80% incremental to our core franchise and will bring new customers into our business.”
However, the companys wine business has been a weak spot. Sales growth has been relatively sluggish. Constellation could have a remedy, though. Its reportedly in discussions to sell several of its low-end wine brands to E. & J. Gallo Winery. This could enable the company to focus more heavily on its faster-growing premium wine brands.
Constellation placed a big bet on cannabis, investing $4 billion in Canopy Growth in 2018. To understand Constellations opportunities in the market, therefore, requires an understanding of Canopys industry position. Most of what we saw with Aurora also applies to Canopy Growth.
Canopy is on track to have an annual production capacity of more than 500,000 kilograms. It claims the most extensive supply agreements in the Canadian recreational marijuana market and captured around 30% of the market in the last quarter. Constellation and Canopy are gearing up to launch a variety of cannabis-infused beverages as soon as Canadas market for the products opens for business.
Internationally, Canopy runs neck and neck with Aurora in most areas of the world, including Europe. But Canopy appears to have an advantage over Aurora in the U.S. hemp market. In January, Canopy announced that it had secured a hemp production license in New York state, where it plans to build a large-scale hemp production facility.
It wouldnt be surprising for Constellation to exercise its options to gain a controlling interest in Canopy in the future. If the global cannabis market grows as much as some think, Canopy Growth could even become a bigger part of Constellations business than beer down the road.
Both of these stocks could be big long-term winners. But I think Constellation Brands is the better pick.
Constellation is definitely in better financial shape than Aurora. The company is quite profitable, whereas Aurora isnt consistently profitable yet. Constellation pays a dividend with a not-too-shabby yield of 1.73%. Its also valued at a level that doesnt cause the heart palpitations some investors might get looking at Aurora.
Overall, I think Constellation Brands is a great way to profit from the cannabis boom and the rising demand for premium beers and other alcoholic beverages in the U.S.
It’s been a couple of weeks now since Canadian marijuana producer Aurora Cannabis (ACB) announced its appointment of Nelson Peltz, CEO and Founding Partner of investment management firm Trian Fund Management, L.P., to be its new “Strategic Advisor.” When that news broke, it sent Aurora Cannabis shares up 14% in a day.
Viewing the news of Nelson Peltz’s appointment in light of revelations gleaned from recent investor meetings with Aurora Chief Corporate Officer Cam Battley, Azer opines that it sees both parties benefiting from this partnership. From Aurora’s perspective, of course, it’s hiring an advisor with deep knowledge of the consumer packaged goods (CPG) industry, and numerous contacts with decision-makers, formed over decades of deal-making — but this association is good for Peltz as well.
The reason: Azer explains that Aurora has a lot of potential to grow and profit as the (legal) marijuana industry matures. And as it does so, Peltz stands to make a pretty penny off of the 20 million stock options that Aurora is awarding him as incentive to give good advice.
The final quarter of last calendar year (Aurora’s Q2 2019) saw the company produce 7,800 kilograms of cannabis, “the highest level of kilograms produced among” Canadian licensed producers of the drug. Aurora’s production even exceeded that of Canadian rival Canopy Growth (CGC), albeit the latter commands a market capitalization 68% higher than Aurora’s $9.1 billion market cap. Furthermore, Aurora reached this higher level of production “despite having a significantly smaller amount of licensed square footage” in which to grow weed.
At a minimum, this suggests that Aurora is a more efficient producer than its rival. It probably helps, explains Azer, that Aurora focuses on growing its cannabis indoors. As the analyst explains, “using indoor grows will become a competitive advantage as it will allow the company to minimize crop losses compared to greenhouse or outdoor grows.”
Such production efficiencies could also help Aurora to become a more profitable pot producer. Currently, Azer estimates that it costs Aurora C$1.92 to grow a gram of salable marijuana. But as production increases and efficiencies save on costs, the analyst sees this cost-per-gram falling to under C$1.
Lower costs will lead to even higher profit margins for Aurora, says Azer — indeed, “industry-leading gross margins.” And when you consider that Aurora already reaps 61% gross margins on its product (versus 48% margins for Cronos, for example, or 29% margins for Canopy), this is saying a lot.
Assuming Aurora succeeds in growing quarterly production to 12,000 kg in Q3, and 25,000 in Q4, the company is on track to produce 500,000 kg — that’s 500 metric tons — of weed annually by mid-2020. Azer expects this to translate into as much as C$742 million in sales that year, and if Aurora maintains this growth trajectory, nearly double that by 2022 — C$1.3 billion, and $413 million in EBITDA to boot.
That’s reason enough for Azer to get excited — and good reason for Nelson Peltz to do his level best to help Aurora meet its goals.