Aurora Cannabis: 3 Off-the-Radar Numbers in Its Q4 Report Youll Want to Know – Motley Fool

Aurora Cannabis: 3 Off-the-Radar Numbers in Its Q4 Report You\ll Want to Know - Motley Fool
Aurora Cannabis: What to Expect from Its Q4 Results
The big day is nearly here for cannabis investors. On Wednesday, Sept. 11, following the market close, Aurora Cannabis (NYSE:ACB) will release its highly anticipated fiscal fourth-quarter operating results.

As youre probably aware, Aurora Cannabis is expected to be Canadas leading cannabis producer, with at least 625,000 kilos of run-rate production by the end of June 2020. Its also been leading its peers in terms of run-rate production thus far in 2019, with more than 150,000 kilos of run-rate annual output through the end of March. Thus, investors are very interested to see what another quarter of ramping up has done to Auroras bottom line.

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But unlike most marijuana stocks, Aurora has been relatively transparent with regard to providing sales guidance well in advance of its quarterly reports. In August, the company guided Wall Street to expect 100 million Canadian dollars to CA$107 million in net fourth-quarter sales, which includes the reduction of excise taxes paid from gross revenue. This suggests gross revenue might come in closer to CA$120 million, which was higher than analysts had been forecasting at the time of its preliminary sales update.

Terry Booth co-founded Aurora Cannabis in 2013 and has served as its CEO since then. He led the company to grow rapidly through a string of acquisitions, including the 2018 buyout of MedReleaf. While those acquisitions have boosted Auroras production capacity tremendously, they have also resulted in the company issuing a massive amount of new shares, diluting the value of its stock. Booth isnt apologetic about Auroras approach, though, stating a few months ago that “if theres one thing I lose sleep about, its our ability to supply the global demand for cannabis.”

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The company also reiterated that it was on track to achieve positive recurring EBITDA during the fourth quarter. However, keep in mind that positive EBITDA doesnt mean that Aurora Cannabis will necessarily be profitable, especially taking into account the bounty of one-time benefits and expenses it regularly accounts for on its income statement. Wall Streets consensus continues to call for a modest net loss for the company in fiscal 2020.

Auroras preliminary guidance increased its quarterly production available for sale as well to a new range of 25,000 kilos to 30,000 kilos. The companys previous forecast had called for 25,000 kilos. This boost jibes with the companys message that production ramp-up is commencing on schedule.

Mike Gorensteins background is in investment management. He was the vice president and general counsel for Alphabet Partners, where he managed a $900 million fund. Gorenstein looked for opportunities in the U.S. cannabis industry but ultimately turned toward Canada instead, co-founding Gotham Green Partners. Gorensteins investment in PharmaCan led to him taking over as CEO of the cannabis producer in 2016, with PharmaCan becoming Cronos Group.  

In other words, with Aurora spilling the beans on its sales guidance and production, the headline numbers for Auroras fourth-quarter report are already pretty well known. But if you wind up looking past the headlines, there are three numbers youll want to pay very close attention to.

Maybe one of the most exciting things about Aurora Cannabis is that it has a chance to be one of the lowest-cost marijuana producers in the world. Its not necessarily the techniques that the company is using to grow cannabis, so much as the sheer size of Auroras operations that could allow economies of scale to really come into play. The fourth quarter could be our first real look at how a large-scale grower pushes production costs down.

Of course, production costs are one side of the coin. Were also going to want to see how well dried cannabis prices held up on a per-gram basis, as well as cannabis extracts. Given the persistent supply shortages throughout Canada, Id expect prices to have held up pretty well from the sequential third quarter.

Perhaps the most important thing for investors to know about Canopy Growth CEO Mark Zekulin is that he wont be at the helm for too much longer. Until a couple of months ago, Zekulin was co-CEO, sharing the top executive duties with Canopy Growth co-founder Bruce Linton. But when Linton was fired in July, Zekulin stated that he would lead the company only until a new CEO could be found.

Putting these factors together will give us our first under-the-radar figure: gross margin. Auroras gross margin has consistently been higher than its mid-cap peers in recent quarters, but Im still not convinced that operating profitability is imminent. Nevertheless, an improvement of a few percentage points in gross margin from the sequential third quarter (Q3 gross margin was 55%) would go a long way to confirming to Wall Street that Aurora is on the path to profitability in fiscal 2021, if not 2020.

What I like the most about Irwin Simon is that he brings a track record of building a successful commercial brand and a reputation for integrity. Even if he doesnt remain the CEO of Aphria, I expect that Simon will stay on as chairman of the board. Hes just the kind of person that Aphria needed to right the ship, and my view is that hes doing a great job at doing just that so far.

The next figure investors should keep a close eye on is international sales, which in the sequential third quarter came in at a pretty anemic CA$4 million — although this was a 40% increase from the sequential second quarter.

International sales are pretty much the future for Aurora Cannabis. Aurora has a cultivation, export, or research presence in more countries worldwide (25) than any other marijuana producer. These overseas markets are going to be especially important if and when dried cannabis production overwhelms the Canadian marketplace. Having up to two dozen external sales channels at its disposal should help ensure that Auroras gross margin doesnt nosedive because of domestic oversupply.

Furthermore, the company has a very clear stated purpose of focusing on the medical side of the industry. Even though the medical cannabis patient pool is considerably smaller than recreational weed, the margins and pricing power are substantially higher. Medical patients tend to use cannabis more frequently, buy regularly, and are more willing to purchase high-margin derivative products. With the exception of Uruguay and Canada, the other roughly 40 countries worldwide to have legalized marijuana to some degree have done so for medical purposes.

While Im not expecting international revenue to make up a large portion of sales, it would be nice to see Aurora tack on far more than the CA$4 million registered in the fiscal third quarter.

Tilray CEO Brendan Kennedy is another cannabis producer top exec with ties to the investment management industry. Kennedy is executive chairman and founder of Privateer Holdings, a private investment firm thats the majority shareholder in Tilray. He served as CEO of Tilray Canada since 2013 and became president and CEO of Tilray Inc. in January 2018.

A final figure youll want to know that Aurora Cannabis is certain not to highlight in its operating results or conference call is the companys ballooning goodwill, which stood at CA$3.18 billion at the end of March. This CA$3.18 billion represents 57% of Auroras total assets.

Zekulins background is in international law. He has been with Canopy Growth since the company began operations. Zekulin served as Canopys president before being named co-CEO in June 2018. He helped lead the company to become the largest Canadian cannabis producer, overseeing all operations except for finance and information technology.

Goodwill is simply the premium that one company pays for another above and beyond tangible assets. Some amount of premium is perfectly normal when making a purchase, as its the dangling carrot that can entice a board of directors to approve being bought out by a larger peer. In an ideal world, the purchasing company will monetize patents and expand upon existing assets to fully recoup the premium thats been paid for another business. Unfortunately, things arent always ideal.

In the case of Aurora Cannabis, its made well over a dozen acquisitions over the past three years, and theyve nearly all contributed to its rapidly rising goodwill. Of course, none has been a bigger culprit than its CA$2.64 billion all-stock purchase of MedReleaf, of which CA$2 billion has been classified as goodwill. In my personal opinion, its going to be virtually impossible for Aurora to recoup CA$3.18 billion in goodwill. Rather, I find it likely that Aurora will admit that it overpaid for some of its deals and eventually write down a portion of its goodwill.

Prior to founding Aurora Cannabis, Booth was a serial entrepreneur. During his career, he has served as president and/or CEO of six companies, including Superior Safety Codes, which was named one of Canadas top 50 fastest-growing companies in 2011.

For the fiscal fourth quarter, investors should keep a close eye on whether or not goodwill rises significantly, as well as whether or not it grows as a percentage of total assets. In my view, a positive result would be seeing goodwill stay relatively flat, with its value as a percentage of total assets declining below 55%.

Now that you know what to watch out for, we simply wait for Aurora Cannabis to deliver the goods after the bell on Wednesday.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

Aurora Cannabis (ACB) is scheduled to report its fourth-quarter earnings results on Thursday. The stock suffered in August due to headwinds in the cannabis industry. So far, September has been positive. As of Monday, the stock has gained 8.7%. Lets see what we can expect from the companys fourth-quarter results.

Previously, I discussed how analysts had a positive take on Aurora Cannabis despite headwinds in the cannabis industry. The company mainly focuses on medical cannabis. The medical cannabis market has a higher profit margin than recreation marijuana. Analysts think that Aurora Cannabis has an edge if it continues with sustainable growth in that segment.

In June, Aurora Cannabis announced how it plans to expand in the consumer cannabis market through vapes, concentrates, and edibles. Canada will legalize the second phase next month. Read Cannabis 2.0 Legalization: Canada Is Ready to learn more. The company also acquired Hempco Food and Fiber to advance its hemp business. Aurora Cannabis obtained Health Canada licenses for outdoor cultivation to conduct research on cultivation techniques.

There werent many changes to analysts estimates for the fourth quarter since our last discussion in August. The revenues could be around  108.2 million Canadian dollars in the fourth quarter—compared to 19.1 million Candian dollars in the fourth quarter of 2018. Analysts expect the company to report a loss of 0.05 Canadian dollars per share in the fourth quarter. However, the estimate is lower than the loss reported in the fourth quarter of 2018. Aurora Cannabis reported a loss of 0.15 Canadian dollars per share in the fourth quarter of 2018. The EPS guidance has been revised upwards since May. The gross margin could be lower at 55% in the fourth quarter compared to 74% in the fourth quarter of 2018.

Aurora Cannabis updated its guidance for the fourth quarter. The net revenues could be between 100 million and 107 million Canadian dollars. The estimate implies a revenue increase of 53%–64% sequentially. The net cannabis revenues could be around $90 million and $95 million for the fourth quarter.

Production could also rise and be at the upper end of 25,000 kg–30,000 kg. Aurora Cannabis expects growth across all of its business segments. For fiscal 2019, the company expects net revenues of $249 million–$256 million.

The companys management also expects a sequential improvement in the gross margin, the amount of cannabis sold, and the cash costs per gram produced for the fourth quarter.

The EBITDA is a vital profitability measure. While most cannabis companies have reported a negative EBITDA, Aurora Cannabis expects to report a positive EBITDA in the fourth quarter. A negative EBITDA implies that the company is spending more on operational costs.

Analysts expect that the company could report a negative EBITDA of 19.5 million Canadian dollars in the fourth quarter. However, the estimate is lower than the EBITDA of 39.3 million Canadian dollars in the fourth quarter of 2018. In contrast, the company expects to report a positive EBITDA in the fourth quarter.

Aphria (APHA) reported a negative EBITDA of 0.2 million Canadian dollars in the fourth quarter. The company reported a profit of $0.05 per share in the fourth quarter. Meanwhile, Cronos Group (CRON) reported a negative EBITDA of 19.6 million Canadian dollars during the second quarter. The company also reported a profit of 0.22 Canadian dollars per share in the second quarter.

Currently, 14 analysts cover Aurora Cannabis stock. Three analysts recommend a strong-buy for the stock for the next 12 months. Around five analysts recommend a buy compared to six analysts last month. Six analysts recommend a hold. The target price didnt change much. The target price is set at 13.23 Canadian dollars, which represents a 68% upside potential for the stock.

Cronos Groups target price is 19.8 Canadian dollars, which is 30% higher than its current price. Aphrias target price is 14.9 Canadian dollars, which is 65% higher than its current price.

August wasnt a positive month for the cannabis sector. There were various headwinds including regulation scandals and Canopy Growths disappointing results. Also, marijuana legalization became a vital topic among presidential candidates.

So far, September has been strong for cannabis. Aurora Cannabis has gained 9.2%, while Aphria and Cronos Group have gained 8.6% and 2.6% in September. The Horizons Marijuana Life Sciences ETF (HMMJ) has gained 4.4% in September. HMMJ tracks the North American cannabis industry.

Aurora Cannabiss outlook and analysts views look promising. Stay with us for an in-depth discussion of the earnings call after the company releases its results. To learn more about Aurora Cannabiss valuation, read Aphria versus Aurora Cannabis: A Valuation Update.

To learn more about the cannabis industry and legalization, read Cannabis: While the US Waits, the World Opens Up.

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