Along with their major reorganization announcement, Aurora Cannabis (ACB) announced plans to create a value brand called The Daily Special. A big part of avoiding the stock over the last year centered on some irrational plans with cultivation targets. The new value brand has some questionable plans while the company is still wildly building inventory levels. While the reorg plans appear logical, investors need to question the execution potential of a company with the previous Chairman and CFO still running the company.
Value Prices Too High
On the FQ2 earnings call, Aurora detailed a market shifting to value brands. The company lists the market share for cannabis selling for less than C$9 per gram as having grown from 2% over the Summer to 17% now. During the period, premium weed lost the majority of the market share.
Using a hockey term considering this a Canadian LP, the question is whether Aurora is actually skating to where the market is headed. HEXO (HEXO) created a value brand called “Original Stash” back over the summer with a price target of C$5 per gram and the illegal market is already down around this pricing level.
In Q4, the price for illegal weed according to Statistics Canada was already down at C$5.73 per gram while legal prices were up at C$10.30 per gram. The concept of value brand weed selling for up to C$9 per gram still appears far off target considering cannabis prices rose during Q4.
The real question is whether Aurora is willing to aggressively compete with the illegal sources and other cannabis companies like HEXO.
Too Much Inventory
The troubling part here is the levels of inventory held by Aurora following several quarters of production far in excess of sales. Even despite this issue, the company forecasts maintaining annual production of 150,000 kg, or the equivalent of 37,500 kg of production each quarter.
The company ended FQ2 with a listed inventory value of C$217 million, up from C$179 million in the prior quarter. Aurora produced around 50,000 kg in excess of production in the last two quarters alone.
For September, Aurora produced 41,436 kg of cannabis while only selling 12,463 kg. For the December quarter, the Canadian cannabis company produced 30,691 kg of cannabis while only selling 9,501 kg. Note, the amount sold declined sequentially as the company dumped less cannabis into the wholesale market.
With so much extra weed in inventory and the company still aggressively growing new weed at a cash cost below C$1 per gram, Aurora should undercut the illegal market here. The company recently reported a quarterly loss of C$80 million so the company needs some aggressive moves to capture market share while cutting costs.
With a targeted C$45 million operating expense base going forward, Aurora doesn’t need as much revenue to turn EBITDA positive.
What does the Street make of Aurora’s prospects? 1 Buy, 11 Holds and 3 Sell ratings coalesce into a Hold consensus rating. However, with an upside potential of over 30%, the stock’s consensus price target stands at $2.07. (See Aurora’s stock analysis on TipRanks)
The key investor takeaway is that Aurora Cannabis still has a Canadian market with a lot of positive catalysts to play out in 2020, but the company lacks the financial discipline for an investment. The stock trades at $1.50 for a reason and the lack of new executive leadership makes Aurora too big of a gamble to buy on any weakness. Investors should prepare for the company to struggle with the massive cuts to the operations spilling over into weak revenues.
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