So you want to invest in a marijuana stock, but you don’t know which one to pick?
That’s not an uncommon dilemma for investors today, says Desjardins analyst John Chu. Attempting to get a handle on the various players in this market, “investors continue to struggle with valuation metrics and market size estimates that seem to be increasing every week.”
So what’s the solution? In Chu’s case, it is to create a “scorecard [that] captures a company’s current operational footprint, its brand and distribution as well as future growth prospects” and to “use this scorecard to help determine our valuation multiple and discount rate relative to its peers.”
Granted, even that isn’t as simple as it sounds. With most cannabis companies being expected to lose money this year, figuring out how to hang a valuation on these stocks can be tricky. Chu’s solution is to guesstimate how a particular company might look five years from now, by which point the analyst believes the industry will have settled down from its current revenue hypergrowth-slash-nonexistent profits stage, and most companies can be expected to earn profits “in the high-teens or low-20% range” as a percentage of revenue.
And that’s what Chu has done for Aurora Cannabis (ACB).
Chu values Aurora stock at a current enterprise value of 22 times its expected earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023. That may sound like a lot to pay for earnings that won’t materialize for another five years. Nevertheless, Chu thinks it’s a relatively safe bet (with only “average” risk), and assigns Aurora stock a “buy” rating and a price target of C$16.50, which implies nearly 35% upside from current levels. (To watch Chu’s track record, click here)
Running Aurora through a battery of tests, evaluating its strengths (and weaknesses) in 24 separate categories, and assigning a score of from 0 to 5 points each, Chu assigns Aurora Cannabis a score of 89 out of 120 total possible points. In Chu’s estimation, Aurora scores highest (4 or 5 points each) in the categories of scale of operations, medical marijuana, technology, management, product awards, innovation, clinical trials, positioning in the hemp and international markets, presence in pharmacies and clinics, having Canadian provincial supply agreements in hand, and being “Good Manufacturing Compliant” (GMP) under EU standards.
But it’s Aurora’s position in medical marijuana that most impresses this analyst. In recreational marijuana, Aurora “is no slouch” with a 13% share of the Canadian market, second only to Canopy Growth (CGC). But “Aurora Cannabis is uniquely positioned to dominate the domestic medical market and, in turn, the international medical market,” says Chu.
Aurora is in the process of building out “the largest production footprint in Canada” — as much as 600,000 kilograms of marijuana production annually, and its operations are more automated than any of its rivals, resulting in as much as 30% additional yield per square foot relative to the competition’s floor space.
Not only does this mean Aurora grows more weed than anybody else. That extra scale of operation, argues the analyst, allows Aurora to grow marijuana more efficiently, such that once it reaches its full potential, Aurora should be able to cut its cost of production to less than C$1 per gram.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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