Aurora Cannabis (ACB) Q1 Earnings On Deck: Can Things Turnaround?

Aurora Cannabis (TSX:ACB) is set to report its first quarter results after the closing bell Thursday, November 14th. The marijuana manufacturer has seen its shares plummet over 44% in 2019 so far as the cannabis industry as a whole has suffered severe losses. The rollercoaster ride that the cannabis industry has investors on has been cited as a major downside to investing in the budding industry.

Investor Jitters Send Shares Spiraling

Investors have been excited about the opportunity to invest in the young marijuana industry. But while these companies are in their infancy, they are prone to mistakes and setbacks as they find their footing.

Aurora in particular faced a setback in Italy. After beating out several other companies to become the country’s sole medicinal marijuana supplier, Aurora ended up losing one of the three original contracts it was awarded after falling short of government mandates.

The Italian minister of health recently stated that one of the three lots awarded to Aurora Cannabis was canceled because it didn't fully comply with the European Union's Good Manufacturing Practice (GMP) standards. The lot in question was said to have high levels of CBD that weren’t in ordinance with EU standards.

The marijuana giant has also been hit with regulatory headwinds in its home country.

Canada’s supply issues have severely stalled pot companies’ growth since the federal legalization in October 2018. Regulatory agency Health Canada has been absolutely buried under cultivation and sales license applications for more than a year now. Even with the agency implementing changes to the grow license application process, there's little chance of Health Canada ridding itself of this backlog anytime soon.

An additional headwind for the young cannabis grower is the company’s big bet on vapes in the Canadian market. The recent onslaught of health issues and deaths linked to the use of THC infused vape products could potentially have a seriously detrimental impact on the future sale of vaping products.

Is the Selloff Warranted?

The company’s setback in Italy, as well as the regulatory probes, have made Wall Street hesitant about betting on the business. However, in terms of production, no marijuana stock on the planet has the ability to produce as much cannabis as Aurora. The company boasts 15 growth sites and has the potential to produce as much as 700,000 kilos a year.

The cannabis producer doesn’t just boast an absurd output, it also produces its product in an efficient manner. When Aurora Sun is fully operational, it'll be yielding at least 230,000 kilos annually from 1.62 million square feet of growing space. That's 142 grams per square foot. Comparably, most growers can hope for 75 grams per square foot to 125 grams per square foot, at their peak.

In addition to the company’s unparalleled ability to efficiently mass produce its product, its international reach is unrivaled. No cannabis producer has a cultivation, research, export, or partnership presence in more countries (25) than Aurora.

Aurora’s ability to produce its product at an unmatched rate makes it susceptible to the supply issues that other companies faced in select US markets and Canada. However, its geographic power allows it to avoid this fate by shipping its surpluses into other burgeoning marijuana markets.

Aurora’s focus on the medicinal marijuana market is also a noteworthy strategy. Medicinal marijuana patients provide higher margins since they use marijuana products more often. They also typically purchase more higher margin derivative products like edibles, vapes, and infused beverages.

Outlook

Along with its industry peers, shares of Aurora Cannabis have been battered this year. The company continues to combat regulatory headwinds such as the Canadian licensing backlog and the federal probe into the sale and effects of vaping products. The company’s Italian contract further perpetuated concerns instead of bringing the assurance a major two-year deal with a country should.

Despite the setbacks that the young pot producer has experienced, the scale at which the company operates and its geographical dominance is something that can’t be overlooked. Its focus on its higher margin medicinal marijuana products should bode well for the company in the long-run, as many other companies focus on the larger but less profitable recreational use market.

Our Q1 consensus estimates project Aurora to see its sales grow over 220% to $72.82 million and for earnings to decline 133.33% to a loss of 0.03 per share. Looking ahead to the company’s full fiscal 2020 figures, estimates forecast a net sales surge of 97.85% to $391.87 million and a bottom-line increase of 50% to a loss of $0.11 per share.

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