Stay away from Aurora Cannabis (NYSE:ACB) stock. There is little chance the company can make money. Investors are waiting to see how bad the results will be on Nov. 14, when Aurora will report its fiscal first-quarter results.
But don’t expect much.
Average selling prices for cannabis have been falling. This is partially due to the huge oversupply in Canada. The lower-priced black market for weed is also a factor.
In addition, Aurora is on a huge expansion program that is causing the company to blow through its remaining cash. ACB’s cash burn is so high that the company is going to have to take on additional debt.
Another take on Aurora’s problems is that the company is simply building too many greenhouses. Basic cannabis demand is not enough. Moreover, lower black market prices are hurting prices for legal sellers. I wrote about this in my last article on Aurora Cannabis stock. I also wrote about how the company’s cash burn is using up all of its liquidity.
As of June 30, Aurora had only $219 million CAD in cash on its balance sheet. But its free cash flow was negative $607 million CAD in the last fiscal year ending June 30.
That implies that Aurora may have to borrow money to fund its cash burn. According to Cornerstone Investments, banks have already turned down a publicly held cannabis company’s request to build an additional facility. That means there is no guarantee that Aurora can actually fund its present cash burn rate.
Aurora Cannabis Stock Is Overvalued
ACB stock is still overvalued, even though it is off 65% from its 52-week high. At a market capitalization of $3.8 billion, Aurora Cannabis stock is over 9 times its last fiscal year’s revenues. Given its lack of profitability, there is little chance that Aurora stock will rise any further.
As a result, Aurora Cannabis may find it very difficult to raise equity capital at today’s prices. This could force it into a slowdown of capital spending, borrowing more money or selling assets.
Investors will be watching the average selling prices, margins and operating cash flow on Nov. 14. Analysts will also scrutinize the balance sheet. They want to see if there is liquidity to fund the cash burn rate of the past year.
Debt and Asset Sales Funding Losses
For example, Aurora Cannabis announced on Sept. 9 it had borrowed another $360 million CAD from the Bank of Montreal. That might have covered just one quarter’s cash burn rate.
Moreover, Aurora is already deep in debt. It had $631 million CAD in bank debt and convertible debentures as of June 30. So if it used up this $360 million CAD during its first quarter ending in September, the total debt is now $1 billion CAD.
How these lenders justified the loans is hard to understand. As of Q4, Aurora reported a negative adjusted EBITDA of $11.6 million CAD. So it does not even have enough cash flow to cover the interest expenses.
In addition, Aurora raised $86 million CAD by selling shares in another public cannabis stock. Investors may be wondering what other assets Aurora will have to sell to continue its expansion program.
What Investors Should Do With ACB Stock
Pay attention to the company’s reporting about average selling prices. If the average selling prices are still falling, there is very little chance that the company can make money at its present rate of investment in cannabis facilities.
Aurora must take steps to reduce its operating cash flow losses. If not, it will face a cash crunch. But that seems doubtful given Aurora’s current plans.
There are a lot of reasons why Aurora stock could fall further. These Nov. 14 results will be crucial. You would be better off buying a more conservative and dividend-paying stock that buys back its shares. These are called total yield stocks.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.