Aurora Cannabis: Great Signs

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About: Aurora Cannabis Inc. (ACB)
by: Daniel Jones
Summary

The management team at Aurora recently hit it out of the park with some financial data it provided to shareholders.

Strong growth is encouraging, and current development projects will help to expand that growth even more in the future.

Some weaknesses did come up, but the big one is temporary, while the other may be perceived by some investors as a strength.

Overall, this picture is looking up for shareholders, but that will only remain the case while the company's strong growth continues.

The past year or so has been a heck of a journey for investors in Aurora Cannabis (ACB). As the cannabis industry opens up in Canada and throughout other parts of the world, the company has continued to scale up its own capacity and, in turn, has generated ever-growing revenues. It truly has, over this time frame, established itself as one of the handful of market leaders out there today, and while not everything about the company is great, some of its most recent progress is encouraging and suggests that the firm is on the right track to success.

Some really great developments

In its third-quarter earnings release for its 2019 fiscal year, the management team at Aurora announced some exciting developments that investors would be wise to pay attention to. For starters, revenue at the company fared quite well, exploding higher year over year and even coming in higher quarter over quarter. According to management, for instance, cannabis net revenue for the quarter came in at C$58.65 million. This represented an increase of 23.3% over the C$47.58 million the company generated just one quarter earlier and was astoundingly higher than the C$10.81 million seen in the third quarter of Aurora's 2018 fiscal year. Total revenue for the firm on a net basis was C$65.15 million, up 20% quarter over quarter and far above the C$16.10 million seen a year earlier.

Undeniably the single largest contributor to sales growth came from a surge in cannabis kg (kilogram) equivalents sold. According to management, even though the company produced 15,590 kg during the quarter, total product sold totaled 9,160 kg. This was 30.9% higher than the 6,999 kg seen a quarter earlier and was nearly 7 times higher the 1,353 kg seen in the same quarter last year. Part of the reason for this accomplishment was the completion of its Aurora Sky facility and seeing that both it and its Bradford facility grew to full capacity. As a result of these two facilities, the firm's annualized run-rate production stands today at more than 150,000 kg.

One driver, according to management, of Aurora's stronger sales wasn't just the firm's recreational cannabis (which did grow an astounding 37% over the prior quarter), but also its international medical cannabis sales. While medical sales in Canada rose just under 8% quarter over quarter, the growth on the medical side of things internationally was around 40%. As the company continues to invest in that part of the market, I suspect further strong growth will likely continue. It is worth mentioning that while its active registered patient count grew from 73,579 in the second quarter to 77,136 in the third quarter, the company did make up for this because, subsequent to the quarter and as management released its results, this figure had risen nicely to 82,745 individuals.

The last major positive development I saw for Aurora during the quarter related to the firm's cost structure. According to management, the cash cost of producing a gram of cannabis came out to C$1.42 during the third quarter. Not only was this lower than the C$1.92 per gram seen just one quarter earlier, but it also represented a modest decline compared to the C$1.53 per gram seen the same time last year. In the past (and again in this quarter's earnings release), management said that its Aurora Sky facility is able (or will eventually be able) to produce at a cash cost of less than C$1 per gram. Assuming this comes to fruition, this decrease will only be the start of continued improvements for the business.

These kinds of improvements, mind you, are certainly needed if Aurora is to remain a top player in this space. While revenue and production growth are really all that matter to shareholders at the moment, and likely all that will matter for the foreseeable future, there will come a day that the company, to justify its valuation, must be able to provide shareholders with positive earnings and cash flow. During the quarter, Aurora was far from that state, with EBITDA of C$36.62 million compared to C$45.52 million a quarter earlier and the C$12.90 million seen in the third quarter of its 2018 fiscal year.

Some negatives to keep in mind

On the whole, I must say that I was surprised in a good way by what Aurora had to share with investors. That said, there are some items here that were not so good that investors should watch over carefully. For starters, while revenue growth was strong, pricing during the quarter was weak. According to management, net revenue per gram sold during the quarter was just C$6.40, down from C$6.80 last quarter and far below the C$7.99 per gram seen in the third quarter of its 2018 fiscal year. I get scared seeing pricing weaken, mostly because it could imply that demand for cannabis and cannabis products isn't as strong as market participants forecast, meaning that overcapacity could more easily form. Such an issue, if realized, would harm every player in the space and make profitability here less likely.

Fortunately for investors, management did have some explanations on this front. Average prices, the firm said, fell in part due to product mix and also in part due to a higher share of revenue coming from low-margin bulk sales. On the product mix side, the company made clear that it hit some oil extraction capacity constraints during the quarter. This resulted in extract-related sales accounting for only 18% of the firm's revenue and extract-related sales, generally speaking, are higher-priced offerings. Management did reveal, however, that extraction capacity is nearly 7,000 kg per quarter and that by the first quarter of next year will be around 16,000 kg per quarter. Hopefully this will solve the problem, as should the fact that management intends to keep some of the 25,000 kg of output generated in the fourth quarter this year to prepare for the legalization of vapes and edibles.

The last item I have listed here as a negative, but some investors may argue is either neutral or positive, is the latest update regarding Aurora's capital-raising objectives. On May 14th, the company struck a deal with Cowen & Co., as well as BMO Capital Markets, wherein it will be able, at its discretion, to sell, over a period of 25 months, up to $400 million in common stock. The good side is that this will give the company more fuel so that it can grow rapidly, but the downside is that it will cost shareholders in the form of dilution. This dilution may be (likely will be) accretive for shareholders, so even if current investors end up holding a smaller piece of the pie, it could be worthwhile, but until we know for sure how the capital is applied, there's risk here.

Takeaway

For the most part, I must applaud Aurora on its latest performance. Last quarter, I found myself coming down hard on the business but, looking back, I believe I was perhaps too harsh. There are, as with any business, certain weaknesses right now that need to be addressed at some point in the future, but so long as the company can continue on this growth path, investors will be forgiving.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.