Aurora Cannabis' Hard Decisions Makes Analysts Happy

Aurora Cannabis Inc. (NYSE:ACB) announced several difficult moves from the company including the layoffs of numerous employees and the closing of several facilities. The Canadian cannabis company laid off 25% of Aurora’s SG&A staff, most of those to take place immediately and a roughly 30% reduction in production staff over the next two quarters. The cuts went to the highest levels including a restructuring of the executive leadership team and the recently announced retirement of President Steve Dobler. 

Aurora said it has initiated a plan to close operations at five facilities over the next two quarters in order to focus production and manufacturing at the Company’s larger scale and highly efficient sites. The company will take a charge of $60 during the fourth quarter in order to make these changes. Certainly, it was awful news for the workers at the company who are losing their jobs during a pandemic, but it seemed to cheer the analysts covering the company as ratings were changed. 

Stifel Upgrade

Stifel analysts upgraded Aurora Cannabis to hold from sell following the news and said that the company has “weathered the storm.” The stock price target was also raised from C$6.20 to C$17.50 ($12.89). “We believe ongoing cash needs, potential equity dilution, and risk around debt covenants remain as impediments to a more constructive approach with the shares enjoying a still robust valuation (C$2.5 billion enterprise value),” the analysts wrote. “But with the reiteration of the F1Q21 positive EBITDA target, market share gains by Aurora, and stronger Canadian market trends, we believe the fundamental outlook and potential for capitalizing on the global cannabis category’s development are back in focus.”

With regards to the closures of the facilities, analyst Andrew Carter wrote, “We believe the ongoing costs from these facilities are well ahead of the sales associated with them, and the facilities targeted for closure are not producing second generation products. Aurora suggested these actions will be accretive to
the gross margin overall. We believe these savings will provide fuel for remaining competitive against continued price compression in the Canadian dried flower market. Aurora outlined C$200 million in total expected charges: C$60 million in asset impairment charges and $140 million in inventory, primarily trim, 60% from capitalized costs. The latter illustrates the significant burden and associated risk from inventory, and the facility closures will aid the company’s goal of working capital as a benefit, though we remain cautious given the demands of the evolving category.”

Increased Sales Estimate

The analyst also increased his estimates for sales and EBITDA bringing the F1Q21 EBITDA estimate in-line with company guidance. “We are increasing our F4Q20 revenue estimate to C$75 million (from C$67 million) with a stronger performance in the Canadian Consumer segment. Aurora has gained market share
(outlined below) positioning the company well against a Canadian market that has performed above our expectations with April sales flat from the surge in March. We now estimate flat F4Q20 Canadian adult-use sales with robust consumption tempered by wholesale/retail inventory reductions and dried flower pricing compression. We estimate C$487 million in FY22 sales, +70% from our FY20 estimate driven by growth of the Canadian Consumer business. Our outlook considers Aurora keeping pace with the growth of the Canadian adult-use market with narrow but steadily improving EBITDA, an outlook we believe affords room for error in an increasingly competitive/fragmented Canadian market.”

Other Analyst Changes

Cantor Fitzgerald reiterated its overweight rating on the stock late Tuesday. Canaccord Genuity dropped its price target from C$24 to C$21 (roughly $17 to $15.) Analyst Bobby Burleson wrote, “On the back of Tuesday’s corporate updates, although we believe the rightsizing of Aurora’s operations is a crucial step in the company’s path to profitability, with >C$1.2B of announced write-offs so far in the first six months of 2020 (or ~25% of the book value of ACB’s net assets), a high degree of uncertainty still clouds this name. As a result, we have lowered our pricing assumptions for dried bud and added a 100bp premium to our adult-use valuation for execution risk. As a result, we are lowering our PT to C$21.00 (from C$24.00).”

According to CNN Business, 15 analysts offering 12-month price forecasts for Aurora Cannabis Inc have a median target of $10.33, with a high estimate of $19.31 and a low estimate of $7.10. The median estimate represents a -24.00% decrease from the last price of $13.59. The current consensus among 17 polled investment analysts is to hold stock in Aurora Cannabis Inc. This rating has held steady since June when it was unchanged from a hold rating.

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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