Does Aurora Cannabis Look Attractive after Its Earnings? – Market Realist

Does Aurora Cannabis Look Attractive after Its Earnings? - Market Realist
Aurora Cannabis Stock Gains as 2 Analysts Tout Its Potential
As recreational marijuana moves beyond buds, and countries besides Canada mull legalization, cannabis companies have a lot of potential roads to travel as they seek to grow.

Aurora Cannabis Inc. ACB, +0.50% ACB, +0.69% , the second-most valuable marijuana producer in the world, is establishing a different path than some of its rivals in the marijuana industry. It has yet to purchase U.S. marijuana assets, as Canopy Growth Corp. CGC, +0.04% WEED, +0.20%  has done, nor signed on a major U.S.-based partner like Cronos Group Inc. CRON, +0.92% CRON, +1.43%  has, nor pushed hard at CBD and hemp, like Tilray Inc. TLRY, -1.25%  .

After Auroras fiscal third-quarter earnings late Tuesday and a conference call Wednesday morning, MarketWatch talked with Chief Corporate Officer Cam Battley about what the company sees as opportunities in cannabis, and where its taking a different approach than some of its rivals. Here is how Battley and Chief Executive Terry Booth, who spoke in the conference call, outlined their thinking on the future.

Booth said in the conference call Wednesday that even if the U.S. were to legalize marijuana federally today, it would take years before the country would be able to ramp supply and solve the issues that Canada has grappled with since recreational pot became legal there in October.

If federal legalization in the U.S. does occur, it would be important to eliminate the barriers moving product between states. If they dont erase the state-to-state line, then its a very difficult market to operate at scale in, Booth said in the conference call. The [multistate operators] have small facilities in various states. Thats not the Aurora way … If they erase the state lines, it becomes a massive opportunity.

Booth pointed to Nevada specifically as the best state for a U.S. company to enter, in large part because of its licensing system and the amount of retail product thats available. Australis Capital Inc. AUSAF, +5.05% , Auroras investment vehicle, is based in Nevada.

Though Battley stressed that Aurora was not making news Wednesday in terms of an announcement to acquire an American business, he reiterated that Aurora is trying to figure out the most appropriate approach to the U.S., with famed hedge-fund manager Nelson Peltz helping out.

Booth did say that some of the American weed companies will have a first mover advantage if the U.S. legalizes pot and that there would be some cherry-picking to do on the [multistate operator] side. The valuations on those companies would inflate significantly if the U.S. federal government legalized pot, but he said its a mistake to value those companies based on their retail presence.

You can always open more retail stores, Booth said in the conference call. The value of the first 25 stores in Ontario is dropping rapidly. Were quite happy we didnt jump into that fray.

For pot products such as vaporizers, Battley said Aurora has allocated its resources toward products that the company knows there is a demand for, based on U.S. state-legal data, and where executives believe they can generate the most profit.

Unlike rival Canopy Growth, which has taken a $4 billion investment from Corona beer-maker Constellation Brands Inc. STZ, +0.76% , Aurora executives say the company is watching beverages closely but has not made a significant commitment to develop beverage products. Battley said it would probably take time, marketing and experience to change consumer tastes and grow the market beyond something like 2% or under in the U.S.

Booth said that if Aurora was going to get into beverages in the near future, it would be some kind of wellness drink.

We think there is a tremendous market potential there, Booth said in the earnings call. But on the intoxification side of the fence, with respect to cannabis drinks, the market is just not there, its not proven to be a popular item anywhere and [were] not able to market it like typical booze companies or beer companies.

Battley said Aurora already has a vape product on the market in Canada under the medical system, and that in general its a strong segment thats not going to require a lot of development. Executives on the earnings call specifically mentioned gummy candy products and vaporizers as some of the best-selling products in the U.S.

When asked by an analyst in the conference call about Auroras growing operations across the pond, Battley said: Let me start by telling you how much we love Europe. Europe is a market where there is very little competition, theres only one producer in Europe right now. Its one of eight thats European Union GMP-certified … very limited competition, very limited supply.

Aurora executives said the company had boots on the ground in Italy, Germany, Malta, Portugal, the United Kingdom and the Netherlands and pointed out that there were only three companies that were awarded contracts to distribute cannabis in Germany.

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I lose sleep over being able to supply this global market, Booth said in the conference call. The European market is going to go nowhere but up, maybe not this quarter on the hockey stick — but well start shipping to Europe in bulk before too long, were the first to sell high-value derivatives in Germany which are starting to get traction with the doctors … they still will take whatever we can give them.

Booth said that if it was a pure business decision 20 years in the future, at todays prices, Aurora might stop selling recreational pot in Canada altogether.

But were not going to do that, he said. Were Canadians: Its Canadian medical patients first, medical patients in Europe second, and the adult-use market third.

Max A. Cherney is a MarketWatch reporter based in San Francisco. Follow him on Twitter @chernandburn.

Aurora Cannabis stock recovered from early morning losses and then some Wednesday afternoon, climbing 3.3% to $8.68 at the close.

Where we were. Aurora Cannabis (ticker: ACB) said in its fiscal third-quarter earnings report released after the markets closed on Tuesday that it sold 9 metric tons of marijuana last quarter.

Despite concerns about slowdowns in Canadas recreational pot market, Aurora Cannabis said net revenue grew 20% quarter over quarter, hitting 65 million Canadian dollars (US$48.5 million). Recreation sales also grew 37% from the previous quarter.

Whats new. Cowen analyst Vivien Azer wrote in a note to clients on Wednesday that Auroras revenue exceeded our forecast, driven by strong demand for adult use products, but the Ebitda loss was larger than Azer had estimated.

She said dried-flower sales were the primary driver, growing 46% quarter over quarter, which was partially offset by a shortfall in extract sales, which were challenged by capacity constraints.

Azer said she thinks Aurora is on track for positive earnings next quarter, although cost containment will be critical.

With continued scale development at Aurora Sky, we would expect to see continued modest improvement as we expect ACB can achieve closer to a 60% gross margin in the next year, ultimately climbing to a mid-60% rate, she wrote.

Desjardins analyst John Chu wrote in a note to clients that sales and Ebitda were below consensus estimates. He noted that higher general and administrative-related costs, though modestly offset by lower-than-expected sales and marketing expenses, were the main driver for Aurora missing his estimate.

In an earnings call Wednesday morning, management said it expects to harvest and dry 25 metric tons of marijuana in the fourth quarter. Executives also discussed the prospects of marijuana vape pens, and organic edibles, which they said will be legalized in Canada as soon as mid-October.


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