Aurora Cannabis, Nelson Peltz, And A Powerful Leverage Strategy

|
About: Aurora Cannabis Inc. (ACB)
by: Gary Bourgeault
Summary

The market is starting to understand the aggressive growth strategy of Aurora Cannabis.

What Nelson Peltz adds to the company and its narrative.

This confirms Aurora will be the partner of choice for many significant companies over the long term.

what Nelson Peltz adds to aurora cannabis source: seeking alpha

The announcement by Aurora Cannabis (ACB) that it has appointed billionaire investor Nelson Peltz as a strategic advisor to the company caused the share price of Aurora to soar over 11 percent.

In this article we'll look at the significance of the appointment, why it underscores the attractiveness of Aurora as a partner, and what it means over the long term.

What Peltz said

I was specifically interested in a couple of comments made concerning the appointment of Peltz as an adviser to Aurora. I'll start with what Peltz had to say:

"I believe Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain and is poised to go to the next level across a range of industry verticals...."

We'll get into it later in the article, but the key thing to focus on in the above statement was the final phrase of taking it "to the next level across a range of industry verticals...."

That means the company, because of its controversial decision (in the eyes of some) to use its stock to rapidly grow via acquisitions, has positioned itself to be the partner of choice going forward because of its rapidly growing production capacity, even though there have been some competitors that have enjoyed major cash infusions.

Peltz went on to say that he is looking "...forward to working with Terry and the extended Aurora team to evaluate its many operational and strategic opportunities, including potential engagement with mature players in consumer and other market segments."

The point there is it's highly probable Pelts will first focus on one of his known strengths, which is his experience and expertise in working with larger companies.

He has enormous capacity to leverage the large amount of supply Aurora offers the market.

How Executive Chairman Michael Singer responded

Executive Chairman Michael Singer responded to a question about whether or not the experience Peltz had with the U.S. consumer goods industry was a key reason behind the appointment.

He said, "we don't see it that way."

We took a very differentiation approach to – I wanted to proceed carefully, thoughtfully and with a focused approach with regards to partnering. We've identified a model that potentially includes multiple partners, increasing the complexity of the discussion.

While he didn't elaborate on it for the obvious reason he didn't want to undermine the importance of working with Peltz, it's important to note this is part of a multifaceted partnership strategy that is just starting to generate momentum.

For some time I've been writing that Aurora would eventually become the leading company of choice for partnerships because of its management team and its willingness to take risks in association with rapidly growing its production capacity in anticipation of increasing demand for medical cannabis in particular.

There is no doubt in my mind this is a precursor to numerous partnership announcements in the future. Along with its production capacity and growing sales, it's the major reason the company is undervalued in my view.

Leveraging production capacity

What the deal with Peltz does is point to the ability of Aurora to leverage its production capacity across a variety of verticals, which is probably why the company decided to partner with him before other companies it has in its partnership pipeline.Investors need to know that within about a year the company has guided it will boost production capacity to over 500,000 kilograms annually. And by my estimates, the current facilities under the company umbrella could add another 200,000 to 300,000 kilograms to that total.

What this suggests to me is even with its presence in 24 countries, the company has more than enough supply to amply supply other markets as well. I see it increasing the number of verticals it competes in as the next stage of its growth strategy; this is why Peltz was brought on and why we'll hear about similar types of deals going forward.

Conclusion

It's important to note that Executive Chairman Michael Singer said the company was taking a very careful approach concerning meaningful partnerships. A lot of financial media outlets and pundits have pointed out in the past that Aurora wasn't able to attract large partners like some of its competitors had. But when you take into account it was clearly going to soar to a market-leading position, it was apparent the company was taking that route rather than getting cash infusion that could have been disruptive from the point of view of synergies and working together toward a visible and agreed upon end goal.

I think they have that in Nelson Peltz, and when other partnerships are announced it'll be clear as to why those particular companies or people were chosen.

The key takeaway in all of this is Aurora Cannabis is starting to stretch its production capacity muscles by looking for more ways to leverage its rapidly increasing market leadership in that aspect of the business.

With the many verticals available to it, presumably they'll have wider margins than the commoditized recreational cannabis segment of the market, which means stronger earnings over the long term.

Since Aurora has been so aggressive in acquisitions for the purpose of adding growth, it has given the appearance of moving too quickly to some. But the reality is it has been very measured and cautious on the partnership side of the business until it achieved production capacity for the long term that is second to none. In that regard it has been very moderate in moving forward.

Add to that its market leadership in the number of countries it competes in, and it's easy to see why the company is undervalued.

Based upon Singer's comments, this is only the beginning of a string of partnerships the company is moving toward, and for that reason it has a strong chance of outperforming beyond its already formidable growth trajectory associated with production capacity.

The market will start to look for those companies that can reliably and consistently supply them with needed product. No company will be able to do that at the level Aurora can as the market stands today, or is likely to be at least for the next couple of years.

Disclosure: I am/we are long ACB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.