Aurora Cannabis Inc (TSX:ACB) stock has fallen 44% since its all-time high in March, and is currently trading at a 7-month low, which has many investors wondering if the stock has finally bottomed out. Down from its $10 per share high, the stock is currently trading at $5.59.
Of course, much of Aurora’s downward trajectory has been in tandem with the cannabis sector as a whole. Many investors perceive this market plunge as a much needed market correction in response to the excessive exuberance surrounding the cannabis industry earlier this year.
Reasons to stay bullish on Aurora Cannabis
For starters, Aurora Cannabis delivered positive preliminary results for its June quarter, and seems to have improved its balance sheet. And Aurora’s preliminary Q4 earnings are boding well.
The company estimates that revenue will come in at C$100-$107 million, a 57%-64% increase compared to Q3 levels. Net cannabis sales are estimated to reach C$90-$95 million, implying a solid organic growth. Production is slated for the upper end of a previous 25,000-30,000 kg range.
“The company continues to track toward positive adjusted EBITDA, and in particular adjusted EBITDA from cannabis operations,” Aurora announced in the report.
ACB’s largest competitor Canopy Growth Corp (NYSE:CGC) actually reported a drop in sales in their most recent earnings release, so comparatively speaking, ACB’s most recent report wasn’t too shabby.
Aurora’s stock initially rose 10.3% after the preliminary earnings were announced, only for the gains to be erased throughout the next six sessions. Which brings us to where we are now.
Another reason to stay positive on ACB stock is that the company recently added C$160 million in availability to what had been a C$200 million facility. This is good news for Aurora Cannabis because the company has a convertible bond that matures in March 2020.
Now that the company has a larger credit facility, it can tap the incremental borrowing capacity to repay the convertibles that come due in March. Aurora can then use its free cash flow to repay the facility, which matures in August 2021 — or extend the maturity to finance acquisitions or investments.
Share dilution and cash burn has caused concern.
Historically, Aurora has been able to settle its debentures by issuing shares rather than paying in cash, but that option has been off the table since the March 2020 debenture has a conversion price of $13.05 per share, which is much higher than where Aurora stock currently trades.
Aurora Cannabis closed the Q3 with C$390 million in cash. With C$230 million due in March, it’s already pulled C$144 million from its revolver. Free cash flow will likely be negative in Q4, piling on the pressure.
But ACB seems to be putting its cash towards investments and acquisitions. Earlier this year the company invested in four production facilities, totaling approximately 1.35 million square feet of new facility space across Canada, Denmark and Portugal.
And back in April, the company announced it would acquire the remaining shares of Hempco Food and Fiber Inc. (a transaction valued at $48 million). Based in Vancouver, Hempco is a marijuana company that focuses on hemp-based nutritional products.
So at least the company’s larger credit facility buys the company another 17 months. However, another convertible offering matures in 2024.
According to the company’s Q3 financial statements, that C$459 million bond can be repaid at maturity in shares, not cash. Beginning 2022, ACB can redeem the bonds if the NYSE trading price of ACB stock averages $9.40 for 20 trading days.
But if Aurora unable to hit that mark, the company would have to issue another US$345 million in stock in 2024. With investors already concerned that the share count could swell to more than 1 billion, a lower ACB stock price could mean that more dilution is coming.
Stay tuned for ACB’s next earnings report which is estimated to be released on September 3, 2019.
Aurora Cannabis Inc. (ACB) was trading at $5.58 per share on Wednesday afternoon, up $0.01 (+0.18%). Year-to-date, ACB has declined %, versus a 8.67% rise in the benchmark S&P 500 index during the same period.