Terry Booth stepped down Feb. 6 as CEO of Aurora Cannabis (NYSE:ACB) and Aurora stock fell 29% over several days of trading on the news. It has since recovered some of those losses, but remains well below $2.
It would be unfair to say the company’s stock cratered solely because of Booth’s departure. The $1-billion write-down of its assets and the layoff of 500 employees also put investors in a selling mood.
It Will Be Hard to Find a Quality CEO
Like Bruce Linton at Canopy Growth (NYSE:CGC), it’s never good when a person with such influence on a company’s founding is shown the door, but if the company wants to pull itself out of the hole it’s dug for itself, the board had to go in another direction.
In January, I reflected on the idea of Aurora getting a new CEO. It wasn’t an original idea, mind you. It came from Cantor Fitzerald analyst Pablo Zuanic, who felt the Aurora management team had become bloated and needed a major shakeup, including the replacement of Booth.
I felt Booth could have stayed on as non-executive Chairman to help find his replacement. A less painful goodbye, if you will. The board, of which Booth remains, felt the band-aid had to come off quickly. Executive Chairman Michael Singer has taken over as interim CEO. It will be his job to find the right candidate, perhaps with the help of strategic advisor Nelson Peltz, and the board.
That’s not going to be easy.
MKM Partners analyst Bill Kirk, who has a “neutral” rating and a $1.32 price target on Aurora stock, weighed in on the subject recently, saying “Aurora will have a hard time attracting the talent necessary to instill investor confidence.”
It isn’t hard to understand why.
Aurora finished Q2 2020 with net revenue of 131.3 million CAD through the first six months of the year, a 197 million CAD operating loss, 156.3 million CAD in cash, and debt of 273.3 million CAD. Aurora also has 271.1 million CAD in convertible debentures that pay 5.5% interest semi-annually.
Those aren’t the worst financials I’ve ever seen from a company with a $2 billion market capitalization, but they’re up there. Its current Altman Z-score is 0.55. Anything under 1.81 suggests that a company has a good chance of filing for bankruptcy within the next 24 months. Barring some miraculous turnaround in its revenue and operating losses, it’s only going to get worse before it gets better.
Last August, I suggested three names, including former Nike (NYSE:NKE) CEO Mark Parker, as possible replacements for Linton. Constellation Brands (NYSE:STZ) chose to go with one of their own, appointing CFO David Klein as CEO of Canopy Growth.
At least Canopy Growth had plenty of cash, allowing it to take its time finding a successor to Linton. I’m not sure Aurora has either luxury.
The Bottom Line on Aurora Stock
As I stated in January, Aurora needs Nelson Peltz to step up to the plate and help it get through this troubling period in the company’s history. Investor confidence is at an all-time low and there doesn’t appear to be any quick fixes, other than the ones it announced on Feb. 13.
The analysts are divided about what lies ahead for Aurora. Some, like Eight Capital’s Graeme Kreindler, is cautiously optimistic.
“[Booth’s departure] signals the ongoing maturation of ACB and the entire sector from its entrepreneurial roots to an industry that continues to prioritize disciplined cash flow management and returns on capital,” Kreindler wrote in early February. “[Booth’s replacement ] will have experience in managing a global business and a track record of allocating capital in strategic initiatives.”
Others aren’t nearly as confident.
“Although we don’t view the departure of Mr. Booth in isolation to be a concern, after disappointing FQ1 results, increasing industry headwinds and now surprisingly muted expectations for Aurora’s remaining FY20, we have made substantial downward revisions to our model,” stated Canaccord Genuity analyst Matt Bottomley.
However, there is consensus amongst most of the analysts covering Aurora, that it needed a significant pruning to rein in costs relative to its revenue structure. That process is underway.
In the months ahead, investors will find out who Booth’s replacement is. Unlike Canopy or Cronos Group (NASDAQ:CRON), it doesn’t have well-funded partners to lend a hand.
At best, Aurora is a speculative buy. I wouldn’t touch it until some of the questions facing the company, including finding a new CEO, are answered.
Until then, all bets are off.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
