Time to Hit the Panic Button With Aurora Cannabis? Why 1 Analyst Slashed His Price Target by Over 30% – Motley Fool

Time to Hit the Panic Button With Aurora Cannabis? Why 1 Analyst Slashed His Price Target by Over 30% - Motley Fool
Meet Aurora Cannabis (ACB) New Bear
Aurora Cannabis (NYSE:ACB) is finding out just how true the line from the old blues song is. The stock sank last week after it whiffed on fourth-quarter revenue guidance that it had provided less than a month earlier. Now the big Canadian cannabis producer is feeling the sting from a top analyst piling on.

Stifel Nicolaus analyst Andrew Carter downgraded Aurora stock from a hold to a sell rating earlier this week, and slashed his one-year price target by more than 30%. Is it time for investors to hit the panic button with Aurora?

Stifel Nicolaus pretty much doesnt like anything about Auroras near-term prospects. It lowered its full-year fiscal 2020 sales projection for Aurora from 600 million Canadian dollars to CA$485 million — a 19% reduction. This likely stemmed at least in part to Auroras chief corporate officer, Cam Battley, stating in Auroras Q4 conference call that the company is “anticipating a bit of a plateau” in adult-use recreational cannabis sales between now and the launch of the “Cannabis 2.0” cannabis derivatives market in Canada.

ACB stock is reacting to its apparent need for more liquidity. For example, Aurora’s capex spending in Q4 ending June was $167 million CAD alone. ACB sold assets worth $117 million CAD. If it had not done so, losses and investing activities would have drained out $297 million CAD during Q4.

Auroras pathway to profitability also appears likely to be full of potholes, according to Stifel Nicolaus. Stifels Carter predicted that the cannabis producer wont achieve break-even earnings before interest, taxes, depreciation, and amortization (EBITDA) until the first quarter of fiscal 2021. 

ACB is still generating huge cash flow operating and investing losses. During Aurora Cannabis’s Q4 ending June, its operating losses and investing activities drained out $180.4 million CAD. The amount includes required capital expenditures (capex) and asset sales.

Battley claimed earlier this year that Aurora would post positive adjusted EBITDA in its fiscal 2019 fourth quarter. After that didnt happen, the companys CFO, Glen Ibbott, said that Aurora is “moving to EBITDA positive in the short term, not the long term.”

But Stifel now has a more negative short-term view. It thinks that Aurora will post negative EBITDA of CA$89 million in fiscal year 2020, lower than the previous estimate of an EBITDA loss of CA$32 million.

In summary, ACB stock is not going to rise anytime soon — at least not until Aurora can stop the cash flow hemorrhaging. In fact, Aurora Cannabis stock could crater, especially if more equity needs to be raised.

In my view, the biggest problem identified by Stifel Nicolaus is one that Bank of America Merrill Lynch analyst Christopher Carey raised a couple of months ago: Aurora is running out of cash. And the failure to achieve positive EBITDA is accelerating the timeline for when the company will need to raise more capital.

By the end of June ACB’s cash and securities balances had dwindled to $218.8 million CAD. So you can see why Aurora needed to raise the $360 million CAD credit facility in early September.

Stifel expects that Aurora will burn through nearly all of its cash over the next three quarters. Before it runs out of cash, the cannabis producer will have to go to the well again. Andrew Carter thinks that will happen before the end of March 2020.

This time around, that could be more challenging than in the past. Carter wrote to investors about “the backdrop of overwhelmingly negative investor sentiment toward the [cannabis] sector, damaged credibility, and limited catalysts near-term to drive enthusiasm for the shares.” This kind of environment is problematic for a company trying to raise capital by issuing new shares.

Canopy Growth (NYSE: CGC) has a $12 billion CAD market value. But CGC has $3.2 billion CAD in cash and securities as of June. ACB has only $236 million CAD based on the calculations above.

An uphill climb to generate more cash couldnt come at a worse time. Aurora is already behind some of its peers, particularly Canopy Growth, in jumping into the U.S. hemp market. Aurora Executive Chairman Michael Singer said in the Q4 call that entering the U.S. is “now a key objective” in fiscal 2020. But making that leap will require more money.

The market was deeply disappointed. ACB had guided analysts to expect revenues from $100 million CAD to $107 million CAD for the quarter. But revenue came in at $99 million CAD.

Theres an awful lot of doom and gloom for investors to digest related to Aurora. Is it time to panic? Not for long-term investors.

The September quarter needs to start showing the company is profitable on a free cash flow basis. Otherwise, ACB will have to continue raising more debt or possibly even equity.

If you think that the global cannabis market is going to be anywhere close to what even conservative analysts predict it will be, Aurora has a good shot at being a huge winner over the long run. The company has the production capacity and international operations to be successful.

Aurora Cannabis (NYSE:ACB) stock price has been on a deep slide lately. ACB stock is down 14% since it reported earnings on September 11 for the quarter ending June.

On the other hand, if youre not a long-term investor, any time is a time to panic. The short-term volatility associated with investing in marijuana stocks can be downright terrifying.

But the question about panicking over Aurora assumes you already own shares. Whether or not to buy Aurora right now is another matter altogether. The company will have to raise more money. Doing so will require more dilution — either now or in the future.

If ACB’s September quarter was using up another $180 to $200 million CAD, that credit facility just plugged a hole in a dam with a lot of cracks.

I suspect things could become darker before theres light, especially if the plateau predicted by Cam Battley is reflected in Auroras next quarterly update. Aurora could keep on singing the blues for a while.

I would wait for Aurora to become cash-flow positive or until ACB stock stops its present slide. Don’t try to catch a falling knife here.

On Thursday, MKM Partners analyst Bill Kirk initiated coverage on Aurora stock and told investors to sell it.

The revenue miss and the recent credit facility spooked the market. These imply Aurora will not be cash-flow positive anytime soon.

What provoked the analyst to make this move? “We believe profitability for cultivators [such as Aurora Cannabis] will generally get worse before getting better. Pricing is already decreasing and supply availability will continue to grow/improve.” And as any Econ 101 student can tell you, given constant demand, any increase in supply tends to push prices (and profits) down.

It seems amazing that the ACB stock price still has a $7 billion CAD market value given this liquidity balance.

Supporting the theory, Kirk observes that already, “most new markets have shown decreasing profitability for cultivation.” (In Colorado for instance, one of the first states to “legalize” in the U.S., wholesale marijuana flower prices are said to have dropped by half in their first few years of legalization — from $2,000 per pound in 2016 to $1,000 more recently). Despite this fact, most analysts following Aurora stock, notes Kirk, are projecting unprecedented levels of growth for Aurora Cannabis — and in this case, “unprecedented” can be best defined as “historically unlikely.”

Whereas Kirk notes that consensus expectations call for Aurora to swing from negative C$157 million in profit in 2019 to positive C$241 million in 2021, the analyst predicts profitability will be much longer in coming. He projected negative earnings before interest and taxes of C$314 million this year, for example, followed by negative C$265 million in 2020, negative C$199 million — indeed, no operating profit whatsoever before 2024 at the earliest. (And no free cash flow before 2025).

As investors have soured on the marijuana story, resulting in “industry equity declines,” Auroras stock price has suffered greatly — falling by nearly 45% over the past 12 months. This lower stock price could “cause more difficulty [for Aurora] refinancing some convertible notes coming due (March 2020).” Investors who might have happily offered Aurora money in exchange for the chance to later trade in their loan demands for shares of an increasingly higher-priced Aurora stock, will be less enthusiastic about the prospect of getting to buy into a stock thats steadily losing value.

Without the ability to fund itself by issuing convertible debt, Aurora “will have to go back to the capital markets [seeking more traditional loans] at a time when profitability still hasnt been reached.” Such loans could be harder to come by with Aurora looking like more of a credit risk. And even if the company can convince banks to loan it money, they will probably demand higher interest rates, further weighing on the companys ability to turn a profit.

Taking a cue from these hypothetical lenders, Kirk is going ahead and rating Aurora Cannabis stock a “sell” itself, and predicting the shares will hit C$5 within a year. (See Auroras price targets and analyst ratings on TipRanks)


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