Aurora Cannabis: Are Its Q4 Results Good or Bad News? – Market Realist

Aurora Cannabis: Are Its Q4 Results Good or Bad News? - Market Realist
Aurora Cannabis stock drops after earnings, as pot sales miss revised target
Imagine Babe Ruth pointing to the outfield fence before stepping up to the plate, confidently predicting that a home run is on the way. The pitch comes. He swings — and hits a pop-up thats easily caught by an infielder. What a letdown that would have been, right?

That scenario isnt too terribly different from what Aurora Cannabis (NYSE:ACB) just did. In August, the Canadian cannabis producer provided guidance for its fiscal 2019 fourth quarter. It predicted net revenue between $100 million and $107 million in Canadian dollars ($76 million to $81.3 million). That range reflected impressive quarter-over-quarter growth of 59%. A home run.

Ahead of this earnings release, the estimate revisions trend for Aurora Cannabis Inc. Was unfavorable. While the magnitude and direction of estimate revisions could change following the companys just-released earnings report, the current status translates into a Zacks Rank #4 (Sell) for the stock. So, the shares are expected to underperform the market in the near future. You can see the complete list of todays Zacks #1 Rank (Strong Buy) stocks here.

Aurora stepped up to the plate after the market closed Wednesday to report its actual Q4 results. And the company failed to hit that predicted home run. Heres what you need to know.

Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, Medical – Products is currently in the top 28% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Q4 net revenue was CA$98.9 million. Not only was that lower than the range the company projected just a few weeks ago, but it also came in well below the CA$108.3 million expected by analysts.

Aurora Cannabis Inc.Which belongs to the Zacks Medical – Products industry, posted revenues of $85.37 million for the quarter ended June 2019, surpassing the Zacks Consensus Estimate by 6.30%. This compares to year-ago revenues of $14.84 million. The company has topped consensus revenue estimates just once over the last four quarters.

In several respects, the companys Q4 top-line results were very good. Net revenue jumped a whopping 52% over the previous quarter. That kind of growth possibly would have been well received had expectations not been set too high.

Consumer cannabis net revenue, which reflects sales in the Canadian adult-use recreational cannabis market, increased 52% quarter over quarter to CA$44.9 million. Aurora also sold a lot more cannabis in the wholesale bulk market — CA$20.1 million in Q4 versus less than CA$2.1 million in the previous quarter. The companys medical cannabis net revenue climbed 10% to nearly CA$29.7 million.

There are no easy answers to this key question, but one reliable measure that can help investors address this is the companys earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately.

But the average selling prices in the consumer and wholesale bulk markets are much lower than average prices in the medical cannabis market. As a result, its overall average net selling price fell from CA$6.40 per gram in the third quarter to CA$5.32 in the fourth quarter.  

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is -$0.02 on $93.16 million in revenues for the coming quarter and -$0.05 on $487.39 million in revenues for the current fiscal year.

Perhaps the most telling sign of Auroras challenges is the companys statement that “the Canadian consumer channel continues to experience challenges at the retail level in key markets, and resolution of this issue is beyond the Companys control.” In other words, provinces arent opening enough retail outlets yet, causing problems for Aurora and its peers. 

This quarterly report represents an earnings surprise of 100%. A quarter ago, it was expected that this company would post a loss of $0.03 per share when it actually produced a loss of $0.08, delivering a surprise of -166.67%.

Chief Corporate Officer Cam Battley also stated in the companys Q3 conference call that he expected positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fourth quarter. That didnt happen. Aurora instead announced an adjusted EBITDA loss of CA$11.7 million.

While the glaring revenue miss is the big story with Auroras Q4 results, there were several things for investors to like with the companys latest update. The supply constraints of the past dont appear to be a big issue now. Aurora said that its facilities currently have an annualized run-rate of more than 150,000 kilograms of cannabis. The company produced 29,034 kilograms of cannabis in the fourth quarter, up from 15,590 kilograms in the prior quarter.

Gross margin also improved, rising to 58% in Q4 versus 55% in the third quarter. This increase reflected continued progress in reducing its production costs per gram.

Aurora Cannabis Inc. Shares have added about 26.6% since the beginning of the year versus the S&P 500s gain of 18.9%.

Despite failing to deliver positive adjusted EBITDA, the company is tracking in the right direction. Its Q4 adjusted EBITDA loss of CA$11.7 million was a whole lot better than the adjusted EBITDA loss of CA$36.6 million in the previous quarter.

Aurora shouldnt have provided revenue guidance that it wasnt able to hit. And it shouldnt have talked about delivering positive adjusted EBITDA if it wasnt fully confident that it could meet that goal. But the Q4 results werent horrible from an objective perspective, putting aside estimates and predictions.

More importantly, the company should be able to continue on its path to profitability. The Cannabis 2.0 market (referring to the upcoming legalization of derivatives in Canada) presents new growth opportunities for Aurora, which plans to launch multiple new products in December. The company is also evaluating what it said were “a number of alternatives to grow Auroras presence in the U.S. market.” 

Investing in marijuana stocks comes with the kinds of ups and downs were seeing with Aurora. The company itself stated that “quarter-to-quarter sales volumes and revenues may be volatile.” Its share price could mirror that volatility. 

Aurora Cannabis Inc. shares declined over 9% in premarket trading Thursday after the pot company missed revenue expectations even after trimming its forecast.

The Edmonton, Alberta-based Aurora ACB, +3.34% ACB, +3.15%  announced a fiscal fourth-quarter net loss of C$2.26 million on net revenue of C$98.94 million, with an adjusted Ebitda loss of C$11.7 million ($8.9 million). In a separate filing, Aurora said that its net loss attributable to common shareholders was less than C$200,000, and less than a penny a share, with the rest of the losses attributed to two subsidiaries non-controlling interests.

Earlier this year, Aurora executives had said the company was on track to achieve a sort of profitability: On an adjusted basis, the company would post a positive figure for earnings before interest, taxes, depreciation and amortization. Aurora adjusts its Ebitda figure for biological asset transformation, among other things.

But in August, the company appeared to walk back the figure, saying in a news release that it was on track to achieve positive adjusted Ebitda without mentioning a specific time frame, as it had previously. In the outlook provided in Wednesdays announcement, Aurora even stopped pointing to that adjusted profitability, saying instead that it expects adjusted Ebitda to continue to improve in the future due to expected revenue growth, improvements in gross margin and prudent SG&A growth.

Prior to the August guidance, analysts polled by FactSet had estimated fourth-quarter revenue of C$111.9 million. In the August update, the company tamped down expectations, telling investors that it was now on track to book sales of C$100 million to C$107 million, net of excise taxes, but it failed to hit that mark in the end.

In 2019 Aurora took its place as the global leader in cannabis production, research, innovation and international market development, Chief Executive Terry Booth said in Wednesdays announcement. We are executing on all our strategic priorities.

Auroras fourth-quarter results arrive amid a swath of disappointing top-line results from the largest Canadian pot companies. Difficulties growing and packaging the plant have contributed to the lackluster start to legal recreational cannabis in Canada, as has the relatively small number of retail locations in provinces such as Ontario, the most populous.

Much like other cannabis companies that purchased cultivation and other production assets ahead of recreational legalization last October, Aurora carries a substantial amount of goodwill on its balance sheet, roughly C$2.4 billion according to its third-quarter financial results. Its difficult to determine when and if the company will write down the value.

Though Aurora sold its stake in Green Organic Dutchman Holdings Ltd. TGOD, +5.02% TGODF, +4.86%  for C$86.5 million on Sept. 4, those shares were still on the books during the June quarter. The companys bottom line has in the past been affected by the value of a number of its investments in other cannabis companies, such as Dutchman, and swings in the sector.

U.S.-traded shares of Aurora have gained 31% this year, with the S&P 500 index SPX, +0.72%  rising 19.7%.


Posted in Aurora