Aurora Cannabis (ACB), Canada’s production leader in the marijuana industry, made waves last week when it released preliminary fiscal Q4 earnings numbers. The company is not scheduled to report official earnings for the quarter until September 24, but the early returns are looking good.
Starting with the top line, Aurora has said that it expects to report C$100 to C$107 million in net sales for the quarter, and predicts full-year revenues between C$249 and C$256 million. Of the predicted Q4 sales total, Aurora says that C$90 to C$95 million was derived from direct sales of cannabis product.
More importantly, the company is increasing guidance on quarterly production, boosting the figures to the range of 25,000 to 30,000 kilos. This is higher than the previous estimate, which topped out at 25,000 kilos, and a significant build from Q3’s final production amount of 15,590 kilos. It’s important to note that not all of the quarterly production is sold; of Q3’s total production, only 9,160 kilos were sold.
Wall Street Analysts Weigh In
Assessing the preliminary Q4 data, 5-star Cowen analyst Vivien Azer was quick to note the company’s “strength in production and cultivation,” and continues, “ACB remains our top pick in cannabis.”
Of the increasing production, Azer says, “ACB expects a sequential improvement on cash costs per gram… ACB remains among the largest cannabis producers and with cultivation expertise as a key competitive advantage vs. its peers.” She notes that the company’s goal is push production costs below C$1 per gram.
Azer gives Aurora a Buy rating, in line with her bullish view of Aurora and its near- to mid-term prospects. Her C$15 price target on the stock suggests an impressive upside potential of 78% (To watch Azer’s track record, click here).
Reviewing Aurora stock, 4-star analyst Tamy Chen from BMO Capital also sees reason for optimism in Aurora for the near-term. She says, “Management attributed this upwards revision [to Q4 earnings] to the timing of harvests at Sky, which increased significantly into June. Management expects the incremental revenues associated with this production will be recognized over the coming quarters… In addition, some of this production will be held for extraction for value-add products.”
While Chen is less bullish than Azer, reiterating a Hold rating, she still gives ACB an C$11 price target, indicating confidence in a 31% upside to the stock.
Two Key Factors
A pair of points are of importance here for Aurora’s future. Of the first, also relating to Canada’s cannabis market generally, Aurora’s quarter-over-quarter gains indicate that the bottleneck in Canada’s cannabis industry may be loosening. Health Canada is beginning to clear its backlog of licensing applications, which had kept product away from the dispensaries. Aurora’s preliminary sales growth numbers indicate that this issue may be on the way to resolving itself.
The second key factor relates to scale. The company is already the world’s second largest cannabis company by market cap, but the largest by production, with an estimated output of 625,000 kilos by mid-2020 and a projected output, once all of its grow facilities are on-line, exceeding 700,000 kilos annually. As production ramps up, Aurora’s cost per gram will decline, improving the company’s margins and profitability. The Q4 report will give further insight into the effect of scale on the company’s operations.
Bottom Line
Wall Street almost evenly split between the bulls and those choosing to play it safe. Based on 10 analysts polled in the last 3 months, 6 rate ACB a Buy, while 4 suggest Hold. Notably, the 12-month average price target stands at $11.84 (or C$15.68), marking a nearly 85% in return potential for the stock. In other words, even the analysts that are hedging their bets have some healthy optimism reflected in expectations. (See ACB’s price targets and analyst ratings on TipRanks)
