Canadian cannabis company Aurora Cannabis (ACB) has never earned an operating profit, nor generated any operating cash flow, either. Instead, for every year of its existence, its losses have mounted, and its cash burn rate increased, culminating in a $356 million operating loss ($2.4 billion, net) and $509 million in cash burnt over the last 12 months.
Nevertheless, hope that Aurora Cannabis might one day be profitable springs eternal, and BMO analyst Tamy Chen set out to figure out when that day might arrive, conducting "an analysis to assess when ACB could achieve sustainable profitability."
Her findings may surprise you.
Even assuming Aurora does not cut its selling, general, and administrative (SG&A) spending in any "meaningful" way, Chen believes that Aurora Cannabis might successfully sell enough marijuana over the next three years to eventually achieve "EBITDA" profitability (which we'd remind you, is not at all the same thing as GAAP net profitability).
Still, based on her belief that Aurora Cannabis is in the midst of an "aggressive recovery," Chen is willing to rate Aurora Cannabis stock at least Market Perform (i.e. Hold), and assigns the shares a C$7 price target (US$5.25). (To watch Chen's track record, click here)
Now let's find out why she couldn't reason her way to a "buy."
In its fiscal fourth quarter 2020 financial results released September 22, Aurora Cannabis reported a 5% decline in sales to CAD$72.1 million, with consumer cannabis sales growing 36% by volume, but falling 30% in price per gram, resulting in a 9% decline in revenue from that channel. (Gross margins, however, grew by 600 basis points to 35%). Medical cannabis sales increased 4%, and gross margins on these more profitable sales leapt 700 basis points to 67%. And as regards the cost-cutting Chen mentioned, SG&A spending was down 14%.
Despite the better gross margins, Chen called these numbers "disappointing" -- and indeed, Aurora Cannabis ended up reporting a CAD$34.6 million "adjusted EBITDA" tally for the quarter. The company's actual operating and net losses were apparently too embarrassing to admit in its earnings report, and the company did not bother mentioning them. (Aurora did say, however, that its net loss for the entire year was CAD$3.3 billion).
Now, Chen believes that under new management, Aurora Cannabis is "trying to shift from value to more premium" marijuana production, which could have the effect of goosing both sales and profit margins on those sales. " If ACB is successful in this shift," argues the analyst, sales volume probably will not grow at all, but Aurora's market share could stabilize in the "low-to-mid-teens," percentagewise, and revenues will grow at least modestly. In fiscal 2021 for example, Chen is projecting sales of CAD$265 million, rising about 9% to CAD$288 in fiscal 2022.
Both these numbers, however, are below Chen's previous predictions, as is the analyst's predicted "adjusted EBITDA" profit in fiscal 2022 (2021 will be a loss in any event) -- just CAD$3 million.
And net profits, you ask? Sadly, those could still be quite a ways away. Chen predicts a GAAP loss of CAD$1.31 per share in fiscal 2021 and CAD$0.83 in fiscal 2022 -- both numbers much improved from fiscal 2020's CAD$33.84 loss to be sure. But both numbers still negative just the same.
Wall Street backs Chen’s caution here, as TipRanks analytics reveal ACB as a Hold. Based on 14 analysts polled in the last 3 months, 2 rate ACB a Buy, while 12 say Hold. However, the 12-month average price target stands at US$8.08, marking a 79.5% upside from where the stock is currently trading. (See ACB stock analysis on TipRanks)
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