Aurora Cannabis: What to Expect from Its Q4 Results – Market Realist

Aurora Cannabis: What to Expect from Its Q4 Results - Market Realist
Aurora Cannabis: What to Expect from Its Q4 Results
Aurora Cannabis Inc. is expected to report fiscal fourth-quarter earnings Wednesday after the closing bell. The company says it will host a conference call at 9 a.m. Eastern time Thursday.

Earnings: Analysts expect adjusted earnings per share of C$0.047 and unadjusted earnings of C$0.059, according to Bloomberg. Aurora has said it expects positive fourth-quarter earnings before interest, taxes, depreciation and amortization adjusted for items such as biological asset transformation, among other things. But in the companys August guidance, it no longer stated that it expects positive Ebitda in the fourth quarter, only that it is on track to hit the target in the future.

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.

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

Revenue: Analysts surveyed by FactSet expect Aurora to report revenue of C$108 million ($82.1 million) net of excise taxes, versus C$19.1 million in the year-ago period. Aurora reported fiscal third-quarter sales of C$65.1 million. In August, Aurora said it expects fourth-quarter revenue of between C$100 million and C$107 million.

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.

Stock movement: In the past three months, Aurora stock ACB, +4.49% ACB, +4.30%  has fallen 22.8%, as the S&P 500 index SPX, +0.03%  has gained 3.2%

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.

Of the 17 analysts that cover Aurora, nine rate the company the equivalent of a buy rating, six have a hold and two rate the name a sell. The average target price is C$12.57, which represents nearly a 60% upside from Mondays closing price.

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.

Auroras early-August revenue guidance came in below analysts expectations for the fourth quarter, which GMP Securities analyst Ryan Macdonell believes stems from harvests arriving too late to be processed and sold during the fiscal fourth quarter. Macdonell also expects the company is holding back some inventory to prepare for the launch of edibles in Canada in December.

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.

The analyst wrote that Aurora previously hit the upper range of its revenue guidance and he expects the company to do the same for the fourth quarter. Macdonnell has a buy rating on the stock with a C$15 target price.

Cowen analyst Vivien Azer, who has a C$15 target price and rates the stock the equivalent of a buy, wrote in an August note to clients that she expects Aurora will report stronger-than-expected crop yields for its cannabis and a resulting improved cash cost per gram. In the note, Azer wrote that she expects the company to continue to progress to per-gram cash costs of lower than C$1.

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.

We note that the revenue guide comes in below both our and Street estimates, although we do not consider this a significant surprise given the level of reported monthly retail sales coming from Statistics Canada. Given [Auroras] strong production output, we would look for this to translate to strong revenue growth in [fiscal 2020], particularly as new product form factors come online in late-[second quarter] as well as continued brick and mortar rollout.

Aurora also recently sold its stake in Green Organic Dutchman Holdings Ltd. TGODF, -6.23% TGOD, -6.16%, which it acquired in 2018. Aurora Chief Corporate Officer Cam Battley stepped down from Dutchmans board last fall. According to Seaport Global analyst Brett Hundley, the transaction generated C$86.5 million, which he said would pad Auroras cash reserves as it continues to build out its cultivation and processing footprint.

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.

In the past, Auroras investments have generated significant swings in paper profits and losses, depending on market conditions during previous quarters.

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%.

See also: Canopy Growths remaining CEO talks about pot companys shake-up, and the search for his replacement

Stifel analyst W. Andrew Carter initiated coverage of Aurora in June, setting a $10 price target and rating the stock a hold. Carter wrote in the initiation note that his team is taking a more cautious approach to the stock because of a less optimistic view of the global medical-use market outside of Germany and Canada — which Aurora is making a significant bet on — and difficulty the company faces expanding into the U.S.

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.

Like several of the largest cannabis producers in Canada, Aurora has also accumulated billions in goodwill on its balance sheet — the result of acquisitions leading up to federal legalization in Canada. Large goodwill impairment charges are one potential result of the accumulation.

Carter called Auroras expansion in the Canadian market "expensive, referring to the companys acquisition of MedReleaf and CanniMed for a total of C$4.3 billion, most of which was paid for with the companys paper. Beyond the acquisitions, Carters team estimates that Aurora will need to spend an additional C$300 million to C$400 million in capital expenditures to complete its Canada infrastructure investments. The significant cash demand will require consistent open access to the capital markets, he said.

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.

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

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.

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.

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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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