Aurora Cannabis Inc (NYSE: ACB)(TSE:ACB) reported a 35% sequential sales increase for the third quarter to far exceed analyst expectations. While its EBITDA loss was about $10 million worse than consensus forecasted, international medical sales and Canadian recreational sales beat estimates, and gross margins expanded to 42.2%.
“This was clearly a case of the patient being presumed dead, when indeed it's not,” Alan Brochstein, founder of 420 Investor and New Cannabis Ventures, told Benzinga.
Cantor Fitzgerald noted that cost and cash-flow improvements set conditions for positive EBITDA by the September quarter and positive cash flow by the end of fiscal 2021. Despite the company’s outsized leverage compared to peers, analyst Pablo Zuanic sees superior growth prospects.
“This is not a company going bust, and we see value,” Zuanic wrote in a note. “...We think a franchise argument can be made, with ACB being No. 2 in rec (close to WEED), No. 1 in med, and with a relevant overseas presence (for the state of the industry).”
One factor that may affect performance is Aurora’s shifting focus.
“One thing that stood out... is that they are quickly moving away from the legacy acquisitions, with several pending sales of non-core assets and investments,” Brochstein said.
Aurora's Pricing Strategy
The quarter included the launch of Aurora’s low-priced brand, which seized 13% of the Ontario value market.
“Aurora's value brand, Daily Special, can likely drive further share gains from industry down-trading and the illicit market,” Piper Sandler analyst Michael Lavery wrote. “Competing on price comes with risk if Aurora cannibalizes its more premium products, but we believe it fits Aurora's low-cost production advantage.”
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Aurora's International Exposure
Germany recently reauthorized sale of Aurora’s medical products after a two-month suspension for regulatory concerns.
“Aurora has returned to a monthly pace a bit ahead of its history, and we model further acceleration, doubling over the next year,” Lavery wrote. “German sales have been its highest priced and highest margin products, so the suspension of sales there hurt its revenue and margin mix but could add a lift in F21.”
ACB Ratings, Price Targets
Cantor Fitzgerald maintained an Overweight rating and CA$22 price target, while Piper Sandler upgraded Aurora to Neutral but cut its target from CA$12 to CA$10. Brochstein expects the price to strike about CA$15.
“For longer-term investors, I think the stock, like many, is cheap relative to its assets and revenue levels, but the company needs to improve its revenue and achieve its cost reduction plan to provide long-term returns,” Brochstein said.
Aurora Cannabis traded higher by nearly 50% at time of publication around $9.84 per share.