Aurora Cannabis Inc. (NYSE: ACB) is under serious selling pressure as the broad markets are in correction. Although weed stocks have been getting crushed for a long time now, investors historically have made a lot of money bottom-fishing and value investing. The question here is if the pot stocks have reached a favorable valuation for investors?
Last week was the worst for the broad markets since the financial crisis of 2008. The Dow Jones industrial average and S&P 500 have been walloped on coronavirus concerns, and it definitely feels like panic selling. At these prices, marijuana stocks may offer investors an opportunity to chill out.
In February, Aurora Cannabis reported its fiscal second-quarter results. Wall Street responded positively to the results, but the report was missing a few key data points. Namely, a detailed account of expected impairment charges was absent.
When CEO Terry Booth’s departure was announced at the beginning of the month, the company stated that its second-quarter report would include asset impairment charges on certain intangibles and property, plant and equipment in a range of $190 million to $225 million and write-downs of goodwill between $740 million and $775 million.
Instead, investors received a much-abbreviated balance sheet. It showed that working capital rose by 236% year over year in the second quarter, Aurora’s inventory value was up 21% to C$216,735 and total assets had fallen by 17% to C$4.67 million. The reported drop in assets totals nearly a billion dollars, close to the low end of the ranges mentioned. Aurora knows the exact numbers, so it should publish them.
It’s also worth pointing out here that Aurora shares are trading at similar levels to just before this earnings report. So even with this huge market contraction last week, Aurora Cannabis was only back to where it started with second-quarter results.
Who Is the New Chief Executive?
Aurora Cannabis founder and CEO, Terry Booth, announced earlier this month that he will be retiring from his role as CEO. However, he will remain on the company’s board and serve as a senior strategic advisor to the board. Executive Chair Michael Singer was named to the position of interim chief executive, effective immediately.
Separately, Aurora’s chief corporate officer, Cam Battley, resigned unexpectedly in December. At least one industry analyst, Cantor Fitzgerald’s Pablo Zuanic, suggested that Battley was forced out.
Interim CEO Singer outlined what the company plans to do going forward and his plans in particular:
I look forward to serving as Interim CEO and executing on our short-term plans, which include a rationalization of our cost structure, reduced capital spending, and a more conservative and targeted approach to capital deployment. These are necessary steps that reflect a fundamental change in how we will operate the business going forward.
The first step to rationalizing the cost structure is firing about 500 employees, including about 25% of the company’s corporate staff. In the same cost-cutting vein, Aurora plans to reduce its SG&A expenses from $70 million in the September quarter to $30 million to $40 million by the end of its 2020 fiscal year, ending in June.
In a recent note, Cowen analyst Vivien Azer wrote that Canada’s cannabis sales in 2020 would reach only $3.2 billion, roughly one-third lower than her original estimate of $4.6 billion. In this report, Cowen downgraded Aurora Cannabis stock, as well as Tilray Inc. (NYSE: TLRY) and Sundial Growers Inc. (NASDAQ: SNDL).
While the downgrades were pointed at a few companies, the implications for the cannabis market in general are huge. Marijuana stocks have already suffered incredibly this year, and the recent market downturn has not helped one bit.
With the first two months of 2020 complete, cannabis stocks have still been slipping. Aurora Cannabis traded down 30%, Aphria Inc. (NYSE: APHA) about 27%, Hexo Corp. (NYSE: HEXO) about 22%, Cronos Group Inc. (NASDAQ: CRON) nearly 21% and CannTrust Holdings Inc. (NYSE: CTST) was down 19%. Canopy Growth Corp. (NYSE: CGC) and Tilray are doing the best out of the group but are still down 6% and 7%, respectively.
The question here is related to inventory. The path to profitability leads through cannabis fields (or in many of these companies’ cases, hydroponics). Positive EBITDA is only a possibility for Aurora Cannabis, or any of the pot stocks, if the company can move more product.
Black market sales may be a hindrance to this, with competitive pricing, but it has been proven that the demand is there. Not to mention, should the United States legalize marijuana on a federal level, a huge market would swing its doors wide open.