The list of Aurora Cannabis (ACB) pessimists on Wall Street is a long one. Jefferies’ Owen Bennett is among the detractors. The analyst has been on the lookout for signs the company is on the cusp of a meaningful turnaround, but evidence is hard to find.
The Canadian pot producer’s latest quarterly results provided little reassurance.
“First, Canadian sales pressures were more pronounced than we had assumed, with little improvement on the margin profile,” Bennett noted. “Second, given the near-term debt overhang and its high cash burn rate, we raise question marks on whether Aurora’s balance sheet is strong enough to support a potential US push.”
The latter point is the important one. Although Bennett’s fears of a weak Canadian top-line performance were confirmed with recreational sales down by 17% quarter-over-quarter and “little evidence of better margin delivery,” the main driver behind Canadian pot stocks’ – and Aurora’s – 2021 rally, has been about the opportunity south of the border.
It is now realistic to expect US marijuana legalization at the federal level in the near future, and legislation will open the door for the Canadian LPs to enter the lucrative US market.
But how well positioned is Aurora to benefit? Very poorly, according to Bennett.
For some of its Canadian peers, you could make the case that despite the currently stretched valuations, the US market presents a meaningful opportunity.
“For example, Canopy takes ownership in an MSO and Cronos is sitting on C$1bn in cash with little debt, so can buy US assets, or at least invest aggressively. The same can’t be said for Aurora,” Bennett said.
Aurora still has too much debt to pay off and not enough cash on the balance sheet, and to attempt participation in the burgeoning market, there will be a familiar price to pay.
“It is very likely it will need to raise more money which means more dilution, and potentially at a sizeable discount, given smart institutional money will likely prefer US MSOs,” the analyst summed up.
All in all, although Bennett more than doubled his price target on ACB from C$4.59 ($3.58) to C$9.44 ($7.48) on account of the US developments and an improved net debt position, the revised figure still suggests downside of 29% over the next 12 months. As a result, the analyst keeps his Sell rating on the stock. (To watch Bennett’s track record, click here)
The rest of the Street might not be quite as downbeat, yet the C$12.59 ($9.98) average price target still indicates share depreciation of ~6% from current levels. Most still recommend staying away from ACB; the Moderate Sell consensus rating is based on 7 Sells and 4 Holds. (See ACB stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.