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Analyst Sees Some Challenges in Aurora Cannabis (ACB) Stock

Canadian pot stock Aurora Cannabis (ACB) — the second biggest marijuana stock on the market today at a market cap of $9 billion — reports its fiscal Q3 2019 earnings next week (on May 15). In preparation for this big event, Seaport Global analyst Brett Hundley has decided to update his expectations for the company. Hundley reiterates a Hold rating on ACB stock, without offering a price target. (To watch Hundley’s track record, click here)

Aurora has been making a lot of headlines this past month, updating investors on:

  • The status of construction at its “Aurora Sun” grow facility. (Floor space will expand 33% to 1.62 million square feet, and production capacity will exceed 230,000 kg per annum, with more than 1 million plants under cultivation).
  • Its plans to build a new indoor cannabis production facility with 4,000 kg capacity in Leuna, Germany. (Construction will begin this month, and medical marijuana shipments will begin in October 2020).
  • Its acquisition of the balance of shares of Hempco Food and Fiber not yet owned (a C$63.4 million deal).
  • Fiscal Q2 financial results at Hempco (sales doubled year over year, albeit only to $600,000, and the subsidiary lost $1.6 million on those sales).

Citing this “news flow,” Hundley thought it best to summarize for his clients his thoughts on how these developments affect Aurora Cannabis’s prospects going forward. So what did he have to say?

Well, there’s (sort of) good news and bad news, both. Despite the many positive press releases Aurora put out over the past month — we count 20 separate news releases, and that’s just the ones it distributed through Canada’s CNW Group — Hundley doesn’t see any particular need to adjust its fiscal Q3 2019 revenue estimates upwards at all. Instead, he’s sticking with a sales guesstimate of C$71.3 million, and notes that this indicates “sequential growth.”

Actually, the analyst indicates quite a lot of sequential growth. Last quarter, Aurora’s sales totaled only C$54.2 million!

The bad news is that, despite this growth in sales, Hundley says he’s becoming “more conservative on anticipated margins.” The analyst predicts Aurora Cannabis will report C$40.5 million in lost adjusted earnings before interest, taxes, depreciation, and amortization (“adjusted EBITDA,” i.e. not even GAAP) for Q3, followed by a further C$21.9 million in negative adjusted EBITDA in Q4.

Hundley sees Aurora pulling those numbers up over the next couple years, albeit he says that because of the lower profit margins, his estimates are declining “modestly.” In fiscal 2020, Hundley estimates the company will have adjusted EBITDA of C$131 million (15% lower than previously estimated), and in fiscal 2021, C$358 million — a big year over year increase, but still 5% below the analyst’s earlier expectations. Only the end of 2020 does Hundley expect to see Aurora earning consistent 70% “core gross margins.” Hence, the better estimates for adjusted EBITDA in 2021.

Softening the blow for investors who had hoped to hear better news, Hundley does, however, insert a positive caveat into its note. Citing strong demand among consumers, and a production ramp and improved “extraction efficiencies” at Aurora, Hundley hypothesizes that his revenue estimates, at least, might prove “conservative.” (Tellingly though, the analyst makes no such caveat with regard to profits).

One more week, and we should find out for sure.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.


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