How Aurora Cannabis Fared in Its Third Quarter – Market Realist

How Aurora Cannabis Fared in Its Third Quarter - Market Realist
How Aurora Cannabis Fared in Its Third Quarter
Aurora Cannabis Inc. shares weighed on the broader cannabis sector Wednesday, after the companys fiscal third-quarter results showed losses growing at a faster-than-expected clip.

The Canadian company posted losses of C$160.1 million ($119 million), or 16 cents a share, for its fiscal third quarter, after losses of C$20 million, or 4 cents a share, in the year-ago period. Aurora grew gross revenue to C$75.2 million, up from C$16.1 million in the year-ago period. After excluding excise taxes paid to the Canadian government, net revenue came to C$65.2 million.

Chief Executive Brendan Kennedy told MarketWatch in a phone interview that while there was a widespread prediction of a supply glut of cannabis in Canada, that has not turned out to be the case. In fact, Tilray continues to have difficulty sourcing an adequate amount of high-quality marijuana, and Kennedy expects supply issues to remain a problem in Canada for the next 18 to 24 months.

Read now: An entire industry is being built around CBD, but we really dont know that much about it

The reason: The suppliers Tilray expected to purchase from have not been able to produce the needed cannabis, despite promises before legalization that they used to pitch themselves to partners and investors.

Some of them were lying about their funded capacity, Kennedy said in a telephone interview with MarketWatch, adding that public companies inflated that metric because investors based their valuations on it.

Jefferies analyst Owen Bennett said the Tilray report showed encouraging signs, notably an 80% jump in recreational sales over the fourth quarter, although that triggered a steep decline in average selling price.

International sales showed strong growth from the year earlier and the company reported progress with its Portugal facility. The company also said it is putting edibles and beverage infrastructure in place for the full legalization of cannabis derivatives in Canada in October, he said.

On a negative, it is still unclear at what sort of scale they can do derivatives, said Bennett.

The Green Organic Dutchman shares TGOD, +2.87% TGOD, +2.87%  fell 2.1% after the company posted a C$14.1 million loss for the first quarter and revenue of $2.4 million, all of which stemmed from its Poland subsidiary. The company has still not sold cannabis in Canada.

CannTrust Holdings Inc. CTST, +2.63% TRST, +3.05%  shares rose 2.5%, as analysts weighed in on earnings reported Monday. GMP analyst Martin Landry said the numbers were in line with expectations, but that his forecasts could prove conservative given the additional production the company is expecting to come on line later this year.

Chief Executive Peter Aceto told MarketWatch on Tuesday that the company is on track with its goal of 50,000 kg of capacity by the third quarter, while outdoor cultivation could add another 75,000 kg.

Our 2020 forecasts are based on a sales volume of 48 tonnes which may be conservative given that the company could have at least 125 tonnes available for sale in 2020, Landry wrote in a note to clients. This does not include its planned greenhouse expansion which could add another 50 tonnes of production in H2/20, or its intentions for additional outdoor cultivation.

Landry rates the stock a buy and is sticking with his stock price target of $15, which is 81% above its current trading level.

In regulatory news, Michigan has granted licenses to three dispensaries to deliver medical cannabis to patients homes, as news site Marijuana Business Daily reported. The move may offer entrepreneurs in the state a new business opportunity. Delivery is allowed in municipalities with retail stores as well as those that banned them

Also in Michigan, state representatives Yousef Rabhi (D-Ann Arbor) and Jim Lilley (R-Park Lake) introduced a resolution in the state House urging passage of the SAFE Banking act, or Secure and Fair Enforcement Banking Act of 2019, by Congress, according to media reports. The move is the latest by lawmakers in states that have legalized cannabis seeking protection for banks that want to do business with companies.

Because cannabis is still banned at the federal level, banks that are federally backed are reluctant to take on the risk of offering their services to licensed companies, leaving them to conduct much of their business in cash with the attendant risks.

Michigan cannabis businesses operate in a legal, highly regulated industry. They deserve to have accesses to the same banking opportunities as any other business in this state, said Michigan Cannabis Industry Association Executive Director Robin Schneider.

Scientists in Canada have made progress in their efforts to map the cannabis genome, according to a recent study in the Proceedings of the National Academy of Sciences, as reported by Jessica Rabe, co-founder of DataTrek Research. That means that growers will be able to use DNA analyses to screen seedlings for therapeutic or medicinal properties, instead of waiting for plants to mature.

Within three years… none of the plants that were growing currently will continue to be produced, and there will be unbelievable new varieties as a result of marker-assisted hybridization and trait-based selection, said Jeremy Plum at Prūf Cultivar in Portland, as cited by Rabe.

Elsewhere in the sector, Aphria Inc. APHA, -0.72% APHA, -0.64%  was down 0.8% and Hexo Corp. HEXO, +3.92%  was down 1.3%. Market leader Canopy Growth was down 0.82%.

Medical cannabis retailer MedMen Enterprises Inc. shares MMNFF, -1.83%  were up 1%. Valens GroWorks Corp. VGWCF, +2.67%  was up 2%.

Organigram Holdings Inc. OGRMF, +3.34%  was up 3.2%, GW Pharma PLC GWPH, +0.77%  was up 1.3% and Green Growth Brands Inc. GGBXF, +0.24%  was up 2.6%. Curaleaf Holdings Inc. CURLF, -4.30%  was down 2.3%.

The Horizons Marijuana Life Sciences ETF HMMJ, +0.35%  was down 0.6% and the ETFMG Alternative Harvest ETF MJ, +1.41%  was down 0.1%.

The Dow Jones Industrial Average DJIA, +0.39%  was flat and the S&P 500 SPX, +0.54%  was up 0.2%.

But while investors certainly should pay attention to the top- and bottom-line numbers, there were five tremendously important numbers in Auroras Q3 results that you might have overlooked. And these numbers should translate to even better days ahead for the Canadian cannabis producer.  

Auroras Q3 sales of medical cannabis in international markets grew 38% over the previous quarter to 4 million Canadian dollars. Although this represented only 6% of the companys total net revenue, international sales are growing even faster than Auroras sales in the Canadian adult-use recreational market. 

The reality is that the international medical cannabis markets present the greatest long-term opportunity for Aurora — and the company is the leader in international markets. Its encouraging that Aurora achieved impressive international growth despite facing supply shortages for exporting overseas. The company should be able to allocate more product to international markets this year, which should drive growth even higher.

Another number in Auroras Q3 results that many might have skimmed past is the companys significant improvement in reducing its cash cost per gram to produce cannabis. Aurora reported a cash cost to produce per gram of dried sold in Q3 of CA$1.42, down 26% from the second quarter. The key to this improvement are higher production volumes and plant yields.

The great news for Aurora is that the picture should get even better as it realizes economies of scale at its “Sky class” facilities. Auroras management team fully expects that its production cash cost per gram at Aurora Sky and similar facilities will keep falling until theyre well under CA$1.00 per gram. This should give Aurora a competitive advantage over many companies. 

Yes, Auroras net loss of CA$158.4 million looked pretty bad at first glance. But it included a CA$102 million impact from a noncash fair value loss in the companys convertible notes due to a strong increase in Auroras stock price. And the net loss also overshadowed the fact that Auroras Q3 sales, general, and administrative (SG&A) expense increased by only 1% compared to Q2.

Aurora is doing really well at controlling costs. Keeping a lid on expenses with revenue continuing to soar should bring smiles to the faces of the companys shareholders. Aurora expects to achieve positive EBITDA next quarter — a great milestone on the way to profitability.

Aurora leads the cannabis industry in funded production capacity. Its made significant progress toward its goal to be able to produce over 625,000 kilograms annually. Aurora stated that with the Aurora Sky and Bradford facilities in full operation, it now has an annualized production run rate of more than 150,000 kilograms. 

Capacity is crucial in generating revenue growth. Aurora will be able to produce plenty of cannabis without relying too much on offtake agreements with third parties. That gives the company more control over its supply and helps reduce costs. 

Its not just the production capacity of cannabis plants thats important. The capacity to extract cannabis oils is also critical. Aurora acknowledged that its capacity to extract oils was a limiting factor in the third quarter. But the company has boosted its international extraction capacity to nearly 7,000 kilograms per quarter and expects to up that number to close to 16,000 kilograms in its fiscal first quarter.

Cannabis oils command premium prices. And with the anticipated launch of Canadas cannabis beverages and edibles market later this year, increased extraction capacity will be paramount. Auroras efforts to beef up its extraction capacity should pay off in higher revenue and gross margin in the near future.  

Theres also one number that Aurora didnt mention that has been on investors minds. That number is zero — and it reflects how many partners the company has outside of the cannabis industry. Auroras lack of a major partner has arguably kept its market cap well below that of its top rival, Canopy Growth.

But Aurora might not have a different number in this category in the not-too-distant future. It brought billionaire investor Nelson Peltz on board earlier this year to help find prospective partners in industries that could be disrupted by cannabis. The five potentially overlooked numbers mentioned above just might be instrumental in helping Aurora land one or more strategic partners. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Posted in Aurora