Aurora Cannabis Had a Great Quarter — but Heres What We Still Dont Know – Yahoo Finance

Aurora Cannabis Had a Great Quarter -- but Here\s What We Still Don\t Know - Yahoo Finance
Aurora Makes Its Case to Be Pots Dominant Player
Not only did Aurora turn in great Q3 results, but the company also provided several reasons to be optimistic about its future. International sales are increasing significantly. Its production costs are declining. Yet despite so much good news, though, there are still four unanswered questions for Aurora that are very important to investors. 

Anyone hoping for more details on a potential partnership with a major company outside the cannabis industry came away disappointed after Auroras Q3 update. In March, Aurora announced that it had signed up Nelson Peltz as a strategic advisor. Peltz is the CEO of multibillion-dollar investment firm Trian Fund Management. He has extensive ties in the consumer packaged goods industry.

Another element of the overall U.S. cannabis market as it relates to Aurora is that while the company has no plans at this time to export to the U.S., Cam Battley did give a general glimpse into the thought processes of the company. “The other thing to emphasize is once the opportunity exists to build production in the U.S. for us, we build the best cannabis production facilities in the world. I think we have clearly demonstrated that with the highest efficiency, use of automation and technology that nobody else has thus far been able to touch. And the result of it is premium product at a real economical cost. So once the opportunity exists, you can expect that we are going to be looking at using our technological lead to build that capacity ourselves in countries around the world.”

But Aurora didnt provide any new information in its Q3 conference call on how the hunt for partners is going. Some might have even gotten the impression that Chief Corporate Officer Cam Battley was downplaying the search for a partner somewhat, with his statement that Aurora is working with Peltz “on multiple initiatives, including our partnership strategy.”

Thats another way of saying theres a lot of time to prepare for whatever direction the U.S. government takes in regard to cannabis. Those that are making a big splash in the media as a result of the perception theyre being aggressive concerning the U.S. market, in my opinion are doing so because theyre so far behind Aurora at the international level. They know there isnt going to be much in the way of revenue and profits for a long time in the U.S., but they are positioning themselves as leaders there, when in fact it will have little impact on the performance of companies outside of the U.S.

Tilray CEO Brendan Kennedy stated in his companys quarterly conference call that Tilray “has been inundated with contacts from Fortune 500 companies who are interested in exploring partnerships” with the company. So far, we have no idea how many companies Aurora might have talked with about potential partnerships or how far any of those discussions have progressed. 

There is nothing wrong with what Aurora is doing with its international expansion. All thats happening is its putting the various pieces of its production and distribution network together. When thats in place, the revenue is going to soar, as well as earnings, from these higher-margin markets. The good news is this isnt very far away, according to management. Thats important to consider because the timing of its production ramp-up is coinciding with the pace of putting the infrastructure in place that will fuel meaningful growth.

Speaking of Tilray, its already in the U.S. hemp market thanks to the recent acquisition of Manitoba Harvest. Canopy Growth is building a large-scale hemp production facility in New York state and expects to have hemp CBD products on the market by the end of the year. However, we still dont know what Auroras plans for entering the U.S. are.

Right now, they have multiple state operators, multi-state operators that have small facilities in their various states. And thats not really the Aurora way of doing things. And if we do go to the states, we will be focusing on large populations that are not fully established that have regulations that we are able to operate in with profit. If they erase the state lines, that whole picture changes. If you are able to cross those state lines, then it becomes a massive cannabis market.

Aurora Cannabis CEO Terry Booth said in the Q3 conference call that his company “is not being blind to whats going on in the United States.” He noted that Auroras spin-off company Australis Capital is doing deals in the U.S. and that Aurora has rights to buy a significant stake in the company in the future. But Booth added that Auroras strategy to enter the U.S. market is “confidential.”

That of course doesnt mean Aurora isnt interested in the U.S. market, only that its waiting to see first, when cannabis is legalized federally, and second, how that plays out on a state-by-state basis. As it stands today, it appears Aurora is looking at how to play markets in specific, strategic States, rather than try to force its way into a market thats even more difficult than Canada and its provinces. As the company noted:

Aurora currently can produce around 150,000 kilograms of cannabis on an annualized basis. The company is busy ramping up capacity even more.

During Auroras Q3 conference call, Cowen analyst Vivien Azer asked Battley about the rationale for building up so much production capacity when there could be an oversupply situation over the long term. Battley replied that Aurora doesnt “see any shortage anytime soon.” Booth said he still loses sleep over being able to supply enough cannabis for the global market. 

Supply constraints have been a temporary issue, but with the company projected to have somewhere near 400,000 kilograms produced in Canada alone, it should have no problem supplying Germany and other EU markets for many years into the future. By 2020 it should have well over 600,000 kilograms of cannabis production around the world that is available for sale. It has the capacity for a lot more if it is needed.

The reality, though, is that we simply dont know at this point whether Auroras big bet on capacity expansion will pay off anytime soon. If international medical cannabis markets dont grow as quickly as expected, Aurora could have more capacity than it needs. 

When looking at the figures in the latest earnings report for Aurora, a cursory glance at sales results from overseas markets appear to be somewhat anemic in relationship to the overall revenue of the company. After all, as Ive mentioned a number of times, the company has a presence in 24 countries, and it would seem that it would be able to generate significant sales from those markets.

It looks as if Aurora is on track to achieve positive EBITDA in its fiscal fourth quarter, which ends on June 30. But positive EBITDA doesnt mean Aurora will be profitable. Theres still a big question for the company regarding how much additional dilution might be on the way.

With a lot more potential to add capacity, if Aurora needs to ramp production quickly because of soaring demand from the U.S. market after legalization, it already can add about 200,000 to 300,000 more kilograms on an annual basis with its existing holdings (beyond the projected 600,000 kilograms-plus per year it plans on having in place within a year or two).

This isnt a minor issue. Aurora has been the biggest diluter in the value of existing shares in the Canadian cannabis industry. Last month, the company announced that it had filed the needed regulatory paperwork in the U.S. and in Canada to raise up to $750 million by issuing new securities. 

There are two major takeaways from his comments. The first is that Aurora doesnt need to U.S. under its current production capacity plans to sell cannabis. Thats another way of saying its domestic market and international sales outside the U.S. will take up the bulk of its supply. This is an extraordinary statement as to its demand for global demand.

Canopy Growth doesnt have to worry about this problem thanks to the huge cash infusion it received from partnering with Constellation Brands. But Aurora doesnt plan to give up an equity stake with any partnership deal it might make. 

According to the companys figures, Aurora sold C$4 million in dried cannabis to the EU. While that was 40 percent above the prior quarter, it wasnt exactly inspiring if you dont understand where the company is in the process of building out those markets. As a whole, it only accounted for under 7 percent of revenue in the reporting period.

I think Aurora has demonstrated that its on the right track both in the Canadian and international markets. However, I also suspect that the companys unanswered questions are holding the stock back to some extent.

Using the Canadian market as a proxy, the company sees the need for a lot more capacity to meet the soaring demand for medical cannabis in global markets. Supplying the German market is important because its the largest market in Europe, and by gaining success there, the brand of Aurora will gain recognition and trust across the continent.

Yes, I know Auroras shares have soared more than 70% so far this year. But I think the companys market cap could be much closer to that of Canopy Growth if investors were confident about Auroras partnering strategy, its U.S. expansion plans, its capacity expansion, and its capital needs.

The future appears to be bright for Aurora. But, in my view, the sooner the company can provide answers to the open questions, the better off it — and its shareholders — will be.

Aurora is gearing up to compete in the international medical cannabis market, and I believe its positioned to blow past all its competitors, who are still struggling to gain market entry, let alone starting to sell to them as Aurora is now ready to do. This is far more important to take into consideration than a one-off earnings miss.

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

Marijuana stocks got off to a great start in 2019, and Aurora Cannabis (NYSE:ACB) found itself among the top-performing cannabis companies to begin the year. Yet investors have had to wait impatiently for news about just how well Aurora and its peers have done in capturing the full potential of the Canadian recreational cannabis market and in seeking to grow their presence in markets beyond Canada. Aurora has worked hard to get itself in prime position to become the dominant supplier of high-quality cannabis products worldwide, and bullish shareholders have been hungry to learn more about how all those efforts are going.

Coming into its fiscal third-quarter financial report, Aurora investors demanded signs that the company could sustain its leadership role and make headway into securing its prospects against intense competition. Auroras results revealed both the extent of its efforts and their costs, but they made many investors feel more comfortable about whats down the road for the Canadian cannabis company.

Aurora Cannabis fiscal third-quarter results gave welcome news on the state of the global cannabis market. Net revenue of 65.1 million Canadian dollars came in 20% above Auroras sales three months ago and more than quadrupled its year-earlier revenue totals. As weve seen recently, net losses once again ballooned, climbing eightfold to CA$158.4 million.

The biggest sign of Auroras success came from its production and sales volume numbers. The pot producer said that it grew 15,590 kilos of cannabis during the quarter, which was double what it produced just three months earlier and up almost 13 times from its production figures a year ago. On the sales front, 9,160 kilos sold was a more modest 31% rise from the fiscal second quarter, but it was still up more than 575% from year-ago levels.

Without a doubt the most important EU market at this time, and certainly for many years, is Germany. Not only is it because of the potential size of the cannabis market there, but also because the potential medical market, according to Aurora management, is approximately 850,000 in the “very short term.”

Auroras sales mix was balanced. Revenue from medical marijuana was only CA$500,000 less than sales from recreational cannabis. Auroras budding European Union-based business also did well, seeing dried medical cannabis sales climb 40% since the previous quarter. In terms of growth, Canadian recreational consumer sales jumped 37%, compared to just an 8% rise on the medical side in Canada. Yet to some extent, thats to be expected with the legalization of recreational cannabis, as those who want to use marijuana products for health reasons but dont want to jump through the hoops of working with a medical professional to obtain medical marijuana can simply self-medicate with similar recreational products.

The point hes making there is Aurora is so far ahead of its competitors in the quality, productivity and efficiency of the facilities it builds, that building them in various markets is competitive advantage that cant be matched at this time. That means larger harvests per square foot and lower costs.

CEO Terry Booth was pleased with the results. “Im exceptionally proud of our company and team,” Booth said, “as Aurora continues to deliver on our domestic and international growth strategy.” The CEO noted that even with some challenges from the rollout of recreational marijuana in Canada, he believes Aurora can still build a sustainable business over the long run.

The second most important medical cannabis market for the short term is Australia. CEO Terry Booth noted that it has gone from under 500 patients in 2018 to over 5,000 now. Since Australia doesnt have any production facilities at this time, itll be dependent on imports for a long time.

One of the most promising aspects of Auroras quarter, though, was the evidence that its growth initiatives are starting to reap rewards beyond simply boosting revenue. Aurora also managed to cut its costs dramatically, as average cash cost to produce its cannabis plunged more than 25% to $1.42 per gram. The company attributed the drop to the size and efficiency of the Aurora Sky facility near Edmonton International Airport in Alberta, and its likely that Aurora will be able to build even more economies of scale as Aurora Sky and the Bradford facility have reached full capacity.

Aurora sees its capacity paying off in the coming quarter. The cannabis company set a production target of 25,000 kilos for the fourth quarter, and it wants to go beyond leaf to have more vaping products and edibles ready for launch later in 2019.

Yet acquisitions and partnerships will still play a major role going forward. In particular, cannabis oil production has been a chokepoint for Aurora, but its working with Radient Technologies to reverse that problem and boost extra-based product availability in the coming months. Meanwhile, recent acquisitions of Hempco Food and Fiber as well as Chemi Pharmaceuticals should help flesh out Auroras corporate profile while adding lucrative new product lines.

Few marijuana stocks have the capacity to be in the same league as Aurora Cannabis, and many of those that do still face significant competitive disadvantages against the early mover. Given the rapid evolution in the cannabis space, Aurora is far from having a lock on the marijuana market going forward. However, with important initiatives in place to bolster its already strong position in the industry, Aurora Cannabis has the potential to sustain its leadership role among cannabis companies well into the future.

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