Analysts Disappointed With Aurora's Q1, But Some Have Faith In Future Catalysts

Over the last 12 months, Aurora Cannabis Inc ACB stock fell by 37.45%. The company released first-quarter results Thursday that sent the stock further into the negative. 

The Analysts

Bank of America Merrill Lynch's Christopher Carey reiterated a Neutral rating on Aurora Cannabis and lowered the price objective from CA$5.50 ($4.16) to CA$5. 

Cantor Fitzgerald’s Pablo Zuanic upgraded the stock from Neutral to Overweight and raised the price target from CA$5.10 to CA$5.85.

MKM Partners’ Bill Kirk maintained a Sell rating and lowered the price target from CA$3.50 to CA$3.

BofA: 'Success Is Predicated On Externals'

Despite low expectations, Aurora’s first-quarter results were still discouraging, with net sales of CA$75.2 million versus

Bank of America and the Street expecting figures of CA$85 million and CA$91 million, Carey said in a Friday note. 

“Overall, CQ3 won’t inspire confidence. ACB also did not offer much insight on Dec qtr (perhaps reasonable given uncertainty on stores), only suggesting trends could stay similar pending more stores/rec 2.0 in CQ120.”

Aurora has CA$458 million liquidity versus cash use of CA$522 million, which means it will have to use its remaining equity ATM to make up for the difference, the analyst said.

The company did not say whether it has plans to leverage its ATM, but rather highlighted the importance of opening new retail stores, he said.

“While there are signs the store situation is improving (Ontario on stores), clearly success is predicated on externals (as with the entire industry).” 

Cantor Fitzgerald: Aurora Better Off Than Cannabis Peers 

Cantor Fitzgerald is upgrading Aurora despite the company missing the consensus sales estimate and posting worse adjusted EBITDA results on a quarter-over-quarter basis for the following reasons, Zuanic said: 

They don’t expect a worse quarter for the group, and feel positive about the catalysts for CY20.

According to their analysis of the quarter for the group, Aurora is “overall in better shape than peers.”

The company’s 12-month recreational market performance and its Cannabis 2.0 prospects seem positive.

Aurora is making more resolute moves than its competition by delaying expansion plans, lowering capex and cutting SGA/sales, the analyst said. 

“We think catalysts more than notions of fair value will dictate share price performance, but at $3.84, the stock trades at11x our CY20 sales estimate and 7x CY21, while we see fair value for the top performers at 10-15x.”

MKM Partners: Profitability For Cultivators Endangered 

The consensus expectations for adjusted EBITDA profitability by June 2020 are unrealistic, Kirk said in a Friday note. 

Counting on the government to open stores and relying on the success of Cannabis 2.0 is too risky to advocate for upside, the analyst said. 

“In addition to our concerns around operational trends, we worry about next week's conversion of a minimum of ~C$155m of convertible notes for two reasons: 1) converted holders will dilute existing shareholders by ~5%; and2) with no lock-up required, shares may hit the market so converted holders can recover face value.”

Profitability for cultivators is generally endangered, with prices falling and supply continuing to improve, in MKM's view.

“We estimate the current run-rate of the top seven producers already covers the legal market consumption demand.”

Kirk said he doesn’t expect for Aurora to achieve positive free cash flow until fiscal year 2025.

Price Action

Aurora shares were down 14.59% at $2.81 at the time of publication Friday. 

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Photo courtesy of Aurora Cannabis.