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Aurora Cannabis (ACB) Stock Is Still a Buy, Says Analyst

Are you sitting on the edge of your seat yet? Well, if not, perk up: Canadian marijuana stock Aurora Cannabis (ACB) will be announcing fiscal Q3 2019 earnings tomorrow after close of trading. In preparation for which Canadian investment banker GMP Capital has published an “earnings preview” of what investors can expect to hear when Aurora reports. GMP’s Martin Landry maintains a Buy rating on Aurora stock with a price target of C$15 — or US$11.13 —  which should be good for about 40% profit from today’s prices. (To watch Landry’s track record, click here)

Health Canada has been reporting slower-than-expected sales of “recreational” marijuana in the country, in reaction to which Landry is pulling in its horns a bit. Instead of the C$91 million in sales he had expected Aurora to report for Q3, and the C$150 million he expected the company to guide towards for Q4, the analyst now believes Aurora will do sales of only C$74 million in Q3, and C$132 million in Q4.

As a result, Landry now believes that full-year fiscal 2019 revenues at Aurora will be only C$289.7 million (an 11% reduction from previous estimates), with larger losses of C$109.6 million EBITDA to boot. Furthermore, the analyst postulates weaker revenues in fiscal 2020 as well — C$630.6 million, or about 4% below previous estimates.

On the plus side, Landry believes EBITDA will turn positive in 2020 — C$101.4 million — and the company’s net loss will shrink to just C$0.09 per share.

What’s going wrong at Aurora (if anything)?

Importantly, if Landry seems less enthusiastic about Aurora stock than he once was, the analyst does not blame Aurora for this. Instead, Landry notes that “provincial regulators” have capped the number of legal marijuana retail stores that can be built, artificially depressing sales and “hindering black market penetration.”

Translation: Canadians may still be buying a lot of weed. It’s just that they’re still buying a lot of it illegally, because there aren’t enough places to buy the stuff legally. In other words, the demand is still there, if regulators will just get out of the way and allow Aurora to satisfy that demand … legally.

Now, in regulators’ defense, Landry notes that they’ve explained their restrictions on licensing new stores by saying there’s not currently enough legal pot being produced to justify opening new stores. But again, while this may sound like bad news, it actually may not be.

“Supply constraints are waning,” notes Landry “with ACB’s capacity going from 100 tonnes planted as of January to 120 tonnes planted as of February.” Assuming regulators’ explanation for why they’ve been slow to approve more stores is truthful, and correct, then the analyst predicts “we could see provinces begin to lift the cap on retail licences in the near-term, thereby boosting sales growth” overall, and for Aurora in particular.

Landry notes that Aurora holds leading position in “dried flower SKUs” (i.e. different types of smoke-able pot for sale), occupying “over 25% of digital shelf space in 2019.” As a dominant force in the market, increased sales of cannabis, in general, should disproportionately benefit Aurora , in particular.

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


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