MKM lowers quarterly estimates for Canopy Growth and Aurora Cannabis ahead of Thursday earnings – MarketWatch

MKM lowers quarterly estimates for Canopy Growth and Aurora Cannabis ahead of Thursday earnings - MarketWatch
Auroras Q1 Results Loom: Will Analysts Stay Bullish?
MKM Partners lowered its quarterly estimates for Canadian cannabis companies Canopy Growth Corp. CGC, -3.68% WEED, -4.24% and Aurora Cannabis Inc. ACB, -4.33% ACB, -4.77%, and said he expects neither company will show much improvement in sales when they report earnings on Thursday. Analyst Bill Kirk cited three reasons for the cuts, namely that inventory being held at provinces is weighing on shipments from manufacturers, pricing is falling and lower prices wont help shift product because legal weed is still way more expensive than black market product. "While net sales estimates have come down for both since the end of August (-18% for Canopy and -25% for Aurora), we believe there is still some risk to revenue estimates and EBITDA estimates (EBITDA estimate only down 8% for Canopy)," Kirk wrote in a note to clients. "With sequential growth suddenly stalling/declining, we believe P&L de-leverage will negatively surprise (costs planned for growth, but no growth)." That will cause the bulls to revisit the industrys expectations about how quickly companies can attain profitability. "For instance, Aurora is unlikely to be EBITDA positive by June 2020 as consensus expects," he wrote. Kirk lowered his sales forecast for Canopys fiscal second quarter to C$95.4 million ($72.1 million) from a previous C$114.5 million and compared with the consensus of C$101.5 million. For Aurora, he lowered his fiscal first-quarter sales forecast to C$92.2 million from a previous C$98.0 million and consensus of C$89.7 million. Kirk rates Canopy as neutral and Aurora as sell. Canopys U.S.-listed shares were last down 0.7% premarket, while Aurora was up 0.3%.

Aurora Cannabis (ACB) is set to report its fiscal 2020 first-quarter results on November 14, and investors are waiting with bated breath. The turmoil in the cannabis sector has led to a negative market sentiment, and Aurora Cannabis has seen its share of suffering this year. What do analysts expect for it going forward?

Aurora Cannabis is likely to have witnessed cannabis revenue growth across all market segments — Canadian Medical, Canadian Consumer and International Medical — in the third quarter. Higher production from companys facilities like Aurora Sky, Bradford, Aurora Air and Polaris might have contributed to growth. With more stores added in recent times, management expects to see a solid first quarter.

On November 6, Compass Point cut Auroras target price to 5 Canadian dollars from 8 Canadian dollars. The company reported disappointing fiscal 2019 fourth-quarter results on September 11, missing its revenue guidance. Peer Canopy Growth (CGC) (WEED) also reported lower-than-expected results. Multiple cannabis companies missing their revenue targets made analysts doubt the future of the sector. Hence, analysts cut the target prices of many cannabis stocks. Recently, PI Financial cut the target prices of a whopping 15 cannabis players.

In Italy, Aurora Cannabis recently won a public tender for supplying medical cannabis for a period of two years, which is likely to have boosted the fiscal first-quarter performance. The introduction of product formats in the Canadian and international consumer markets is also expected to reflect in the upcoming quarterly results.

A total of 17 analysts are following Aurora ahead of its first-quarter results. Their consensus target price for its stock is down at 7.68 Canadian dollars compared to 14.09 Canadian dollars prior to its fourth-quarter earnings release—a fall of 45.4%. Aurora Cannabis closed at 5.03 Canadian dollars on November 8. Its current revised target price shows a potential upside of 53% over the next 12 months.

After Auroras bleak fourth-quarter results, several analysts lowered their target prices. Heres what changes analysts have made to its target price since then:

Cannabis peer Canopy Growth (CGC) (WEED) will report its fiscal 2020 second-quarter results on November 14. Analysts expect its revenue to come in at around 108 million Canadian dollars.

For the quarter to be reported, the Zacks Consensus Estimate for Aurora Cannabis bottom line stands at a loss of 3 cents. The same for revenues is pinned at $72.8 million, suggesting a substantial year-over-year rise of 220.7%.

Aphria (APHA) reported a strong fiscal 2020 first-quarter results. It reported a solid top line with revenue of 126.1 Canadian dollars.

Aurora Cannabis stock now has more coverage from analysts due to its strong fundamentals in the last 12 months. Despite the ups and downs in the sector, Aurora has a strong footing because of its growth and expansion strategies. Last month, it gave an update on the progress of its global operations and growth initiatives.

Furthermore, the number of analysts covering the stock increased from four to 17 over this period. Its target price also increased steadily. Analysts strong buy and buy recommendations also increased.

Earnings ESP: Aurora Cannabis has an Earnings ESP of -6.95%. You can uncover the best stocks to buy or sell before theyre reported with our Earnings ESP Filter.

Aurora Cannabiss target price fell after its fourth-quarter earnings release. However, analysts remain bullish on the stock. The overall rating on the stock is buy or strong buy.

Currently, of the 17 analysts covering the stock, three have given it strong buy ratings (down from four before its earnings release). Four have given it buy ratings (down from six before its earnings release).

Eight analysts have hold ratings on the stock (up from six before its earnings release). One calls the stock a sell, and one calls it a strong sell.

On one hand, its hard to see the companys income statement getting any worse from this point forward, which is a significant positive. Economies of scale should reduce its production costs on a per-gram basis, and Auroras second-quarter report showed notable improvements on the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) front. Though I still suspect Aurora will lose money in fiscal 2020 (ended June 30, 2020), its very possible that an ongoing uptick in sales, coupled with a reduction in major capacity expansion expenses, may push its adjusted EBITDA positive on a recurring basis.

On November 8, Canopy Growth had a consensus hold rating and a price target of 44.4 Canadian dollars, a potential upside of 56.8% from its closing price of 28.3 Canadian dollars on November 8. Canopy closed November 8 with a gain of 4%.

To build on this point, Auroras economies of scale should lead to some impressive yields. At Aurora Sun, a 1.62 million-square-foot grow farm in Alberta, Aurora is forecasting at least 230,000 kilos of annual output, when at full capacity. This works out to about 142 grams of yield per square foot. By comparison, most growers are estimating that their yields will range from 75 grams per square foot to 125 grams per square foot. This combination of growing efficiency and economies-of-scale is expected to help Aurora keep its production costs below the industry average (on a per-gram basis).

Aphria has a consensus buy rating and a price target of 12.7 Canadian dollars, a potential upside of 89% from its closing price of 6.7 Canadian dollars on November 8.

First, Aurora has $230 million Canadian in convertible debentures due in March. The convertible portion of these notes is nowhere near where the companys stock is currently trading, making it highly likely that Aurora will have to settle this debt by paying cash. It might do this by issuing another convertible note, or it could access a $750 million shelf offering that allows it to sell its own stock from time to time. Either way, Auroras finances are a little shakier than investors probably realize, and that may not be fully factored into Auroras share price.

Recently, Aurora was in the news providing updates on its growth strategy. It announced new products with CTT Pharma. These products will be for its medical patients in Canada. It also signed a sublicensing agreement with EnWave in Australia. However, Auroras rising debt concerns compared to its peers are something to keep an eye on. To learn more, read Aurora Cannabis: Why Investors Must Watch Its Debt.

The launch of cannabis derivatives has also been delayed by Health Canada. It was long believed that high-margin derivatives, such as edibles, vapes, and infused beverages, would find their way to retail store shelves no later than the one-year anniversary of recreational weed being legalized in Canada (Oct. 17, 2018). But Health Canada crushed those hopes midyear, noting instead that derivatives wouldnt find their way to dispensaries until mid-December. This means a longer wait for these high-margin products to have an impact.

Alphabets Waymo is shutting their Austin office to merge teams in Detroit and Phoenix. Waymo is looking for other ways to monetize technology.

Refining stocks like Marathon Petroleum (MPC), Valero Energy (VLO), and The Phillips 66 Company (PSX) have risen sharply in the fourth quarter.

This is also a company with a significant overseas presence, as alluded above. Including Canada, Aurora has an export, production, research, or partnership-based presence in 25 countries. If and when dried flower becomes oversupplied and/or commoditized in Canada, the thinking is that these external markets will provide perfect sales channels to offload excess product and avoid an operating margin meltdown.

As of November 8, IIPR was trading at $85.22, which represents an increase of 17.4% since its third-quarter earnings release on November 6.

For one, Auroras peak annual production should be unsurpassed, and that appears to be going a long way with investors. The company has 15 production facilities that have the potential to hit up to 700,000 kilos of annual aggregate output. At least 132,000 kilos of production will be derived from Europe, giving Aurora easy access to Europes burgeoning medical marijuana industry.

Canada-based medical and recreational cannabis company, Aurora Cannabis (ACB) will report its Q1 fiscal 2020 results on November 14.

Another concern has been the exceptionally slow rollout of physical dispensaries in select provinces. Ontario, for example, has a population of 14.5 million people, but only has two dozen open retail locations. Thats only one retail store per 604,200 people, and its made life very difficult for growers to get their product in front of customers.

PG&E reported a net loss of $1.6 billion during Q3, mainly driven by $2.5 billion pretax charges for claims related to the 2017 and 2018 wildfires.

According to a newly released report from the Prohibition Partners, the legal weed industry could be generating as much as $103.9 billion in annual sales by 2024. That would represent a compound annual growth rate of nearly 46% between 2018 and 2024, making cannabis one of the fastest growing industries on the planet.

Chevrons (CVX) and ExxonMobils (XOM) stocks have reacted differently to the companies earnings releases on November 1.

While there are an abundance of pot stocks for investors to choose from, its Aurora Cannabis (NYSE:ACB) that often slots in near the top of the list. In fact, earlier this year it was learned that Aurora was the most-held stock on millennial-focused investment app Robinhood, above the likes of Apple and Amazon.com.

While the Apple TV+ streaming service has gained early momentum, all eyes will be on Disneys (DIS) streaming service, Disney+.

The Apple Card is currently under regulatory scrutiny related to gender-biased credit limit approvals, according to a Bloomberg report on November 9.