Why Aurora Cannabis Fell 10.9% in August – Motley Fool

Why Aurora Cannabis Fell 10.9% in August - Motley Fool
Aphria versus Aurora Cannabis: A Valuation Update
Shares of Aurora Cannabis (NYSE:ACB) fell 10.9% in the month of August, according to data from S&P Global Market Intelligence. Aurora is one of the leading Canadian cannabis producers — in fact, Aurora has the highest production potential of any cannabis company in the world.

Therefore, Auroras stock feels the heat whenever the overall cannabis sector falls out of favor. Thats apparently what happened in August, as Auroras big decline came not after any company-specific news, but rather after the earnings reports of peers Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY).

Barring a big announcement in the year-end report, the odds are that Aurora wont get a big bump in price even if it does fall within the range of sales that it forecast last month. The saving grace for the stock could be that since it is already near its low for 2019, a large drop in price now might be unlikely. However, given the industrys track record of disappointing investors and analysts, it might be a safer idea to wait until after the company releases its earnings to make a purchase decision. Theres simply no compelling reason to buy the stock any earlier.

In early August, Aurora actually gave preliminary revenue numbers for the quarter ended June 30, though the company wont report official earnings until Sept. 12. Aurora expects revenue between $100 million and $107 million, compared to $19.1 million a year ago and $65.1 million in the March quarter. That was enough to please analysts, which initially pushed Auroras stock up.

In August, Aurora gave investors an update on its operations in which it stated that based on preliminary and unaudited results, it expected sales for Q4 to come in between 100 million and 107 million Canadian dollars. Thats more than five times what the company generated a year ago, back when the adult-use market in Canada hadnt yet opened for business. Those are some impressive sales numbers, and they would be even higher than what rival Canopy Growth (NYSE: CGC) was able to generate in its latest results, when it posted revenues of just CA$90.5 million.

However, in mid-August, Canopy Growth filed its earnings report, which missed both revenue and profit expectations by a wide margin. Tilray also delivered an earnings report that missed profit expectations, though it did beat analyst expectations for revenue. Of particular note was Tilrays reported 28% decline in average price per gram during the quarter. That may have led investors to believe that the Canadian market is oversupplied.

As good as those sales numbers would be for Aurora, the problem is that this isnt new information anymore. When the company released that update on Aug. 6, the stock got a big boost, climbing as high as $7.20 that day. Effectively, those sales figures are now priced into the stock, and theyre going to be the benchmark for analysts. Sales landing in the lower end of that range could have a negative impact on the stock. Sales would likely need to finish near the top end of the range for the share price to benefit from the impressive growth.

It was odd that Auroras stock declined so much with its peers after it had already given quarterly revenue numbers. Nevertheless, the whole sector has been under pressure in the second half of this year. Concerns about valuation, combined with a risk-off mentality in the markets, have weighed on all cannabis producers since the spring.

The number that investors will be looking at in Q4 is the companys net income and whether it can follow up competitor Aphrias (NYSE: APHA) impressive results. Unfortunately, that might be a long shot at best for Aurora this quarter. Coming off a loss of CA$158 million in Q3, the company has posted an operating loss of more than CA$74 million in each of the past three quarters. Last quarter, Aurora came in well below estimates, and analysts arent expecting the company to turn a profit this time around.

Aurora officially reports fourth-quarter and full-year earnings on Sept. 12, when management will add additional color to the revenue guidance. Of note, Aurora recently won a big overseas contract in Italy in July, and also bought hemp and CBD company Hempco Food and Fiber Inc. for 63.4 million Canadian dollars in the middle of August.

David Jagielski 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.

Of course, the most important thing for investors to monitor is the state of supply and demand in the Canadian market, as well as the ramp-up of Auroras industry-leading production facilities.

Since the beginning of August, Aphria (APHA) and Aurora Cannabis (ACB) have returned 30.0% and -2.7%, respectively.

Aphria reported a strong fourth-quarter performance on August 1. For the fourth quarter, the company beat analysts top-line and bottom-line expectations. The companys net profits were 15.8 million Canadian dollars—compared to analysts expectation of a loss of 13.9 million Canadian dollars. The impressive fourth-quarter performance caused Aphrias stock price to rise. On August 22, the company announced a distribution agreement with ParcelPal Technology. According to the deal, ParcelPal will deliver Aphrias medical cannabis products to patients. The two companies have selected Calgary, Alberta, to launch their delivery service.

On August 6, Aurora Cannabiss management provided better-than-expected guidance for its fourth quarter. The company also completed its acquisition of Hempco Food and Fiber on August 19. We expect Hempcos acquisition to expand Aurora Cannabiss hemp business in the US. On September 4, Aurora Cannabis sold its stake in Green Organic Dutchman Holdings (TGOD) for 86.5 million Canadian dollars. The company earned a 50% internal rate of return by selling its Green Organic Dutchman shares. Despite all of these announcements, Aurora Cannabis stock has fallen 2.7% since July 31. Weakness in the cannabis sector led to a fall in the companys stock price. During the same period, the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have fallen 8.4% and 6.4%, respectively. Despite the fall, Aurora Cannabis has returned 18.3% YTD, while Aphria stock has increased 18.6%.

Although Aphria stock has increased 30%, its forward EV-to-sales multiple fell from 2.53x on July 31 to 2.39x on September 6. The impressive fourth-quarter performance appears to have prompted analysts to raise their revenue expectations for the next four quarters. The higher revenue estimates lowered Aphrias forward EV-to-sales multiple. The company was trading at a lower valuation multiple compared to its forward EV-to-sales multiple of 2.76 at the beginning of this year and its historical average forward EV-to-sales multiple of 8.90x.

On September 6, Aurora Cannabis was trading at a forward EV-to-sales multiple of 11.77x compared to 12.07x on July 31. The decline of 2.7% is Aurora Cannabiss stock price led to a fall in its EV-to-sales multiple. There wasnt much change in analysts revenue expectations for the next four quarters from July 31 to September 6. However, the company is trading at a higher EV-to-sales multiple compared to 7.58x at the beginning of 2019 and its historical average of 10.48x.

In the above graph, you can see that Aurora Cannabis is trading above its peers median value of 4.74x. In contrast, Aphria is trading below its peers median value.

The better-than-expected adjusted EBITDA in the fourth quarter might have prompted analysts to raise their EBITDA estimates for the next four quarters. The increase in analysts EBITDA estimates brought Aphrias EV-to-EBITDA multiple down. As of September 6, the company was trading at a forward EV-to-EBITDA multiple of 12.86x compared to 33.24x on July 31. Currently, Aphria trades at a higher EV-to-EBITDA multiple compared to 9.58x at the beginning of this year and lower than its historical average EV-to-EBITDA multiple of 28.57x.

Analysts lowered their EBITDA estimates for Aurora Cannabis in the next four quarters compared to their estimates on July 31. The lower EBITDA estimates led to an increase in the companys valuation multiple. On September 6, the company was trading at a forward EV-to-EBITDA multiple of 58.68x compared to 49.77x on July 31. Aurora Cannabis is trading above the forward EV-to-EBITDA multiple of 26.47x at the beginning of 2019 and its historical average of 34.45x.

On September 6, Aurora Cannabis and Aphria were trading at higher forward EV-to-sales multiples than peers median value of 12.26.

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