Jefferies analyst Owen Bennett reiterated his underperform rating for Aurora Cannabis (NYSE:ACB) on Feb. 24 while raising his target price on ACB stock to $7.51 from $3.65.
That’s partially good news. No. No, it’s not. Here’s why.
Aurora Cannabis Is in Distress
It’s been a few months since I last wrote about Aurora in December. I struck a fairly optimistic tone in my article by suggesting that it does own some good assets that will help it grow.
I also felt like its choice as the new Chief Executive Officer (CEO) was a good one given it needed someone that could hit the ground running. Then Chief Commercial Officer (CCO) Miguel Martin was the correct call.
Trading for slightly more than $10 at the time, I recommended that aggressive investors look to buy around $7, while investors interested in a long-term hold look elsewhere. Since that time, the closest it got was $8.31 on the final day of 2020.
As recently as mid-February, its share price was as high as $18.98. As I write this, it’s bouncing above and below $11.
Given Aurora has an Altman Z-Score of -1.93, an indication that the company is in duress and could go bankrupt within the next 24 months, I really like the analyst’s target price.
If you want to own ACB stock, I wouldn’t touch it above $7.50.
What’s the Problem?
In one word. Debt.
Investors, especially those owning Canadian cannabis stocks, are patiently waiting for the likes of Aurora and Canopy Growth (NASDAQ:CGC) to capture U.S. market share. To do that, you need lots of capital and a little help from the U.S. federal government. Canopy’s got it; Aurora doesn’t. That’s something the Jefferies’ analyst pointed out in his letter to clients.
“[G]iven the near-term debt overhang and its high cash burn rate, we raise question marks on whether Aurora’s balance sheet is strong enough to support a potential US push,” Bennett wrote.
Aurora finished Q2 2021 with 490 million CAD ($385.8 million) in debt, 390 million CAD ($307.1 million) in cash for net debt of $78.7 million. Interestingly, when I wrote about Aurora and some of its Canadian peers in November 2019, it had net debt of 243.2 million CAD, 2.4x as much as it has today.
Its sales haven’t grown much in the 16 months since, but Aurora’s Altman Z-Score is likely in better shape than it was back then. Yet its stock is trading at one-third the price.
So, from that angle, an aggressive investor might consider an investment in Aurora at this point to be a smart move given the general direction of cannabis stocks — ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is up 60.3% over the past three months through Feb. 25.
I, on the other hand, would look at that last stat and immediately think about reallocating what I might have considered dumping into ACB into the ETF. Aurora has a 3.25% weighting.
That’s because I’m always thinking about options that reduce the risk of your investment.
The Bottom Line
When it comes to Canadian cannabis stocks, I continue to like Canopy Growth, Aphria (NASDAQ:APHA), and Cronos Group (NASDAQ:CRON) in that order.
Very few of my InvestorPlace colleagues like Aurora at this point. Faisal Humayun is the exception. At the beginning of February, he put Aurora on a list of four undervalued marijuana stocks.
“A key reason to be bullish on ACB stock is the business transformation plan undertaken by the management. The company has been able to successfully reduce selling, general and administrative costs. In the coming quarters, cash burn is likely to decline significantly,” Humayun wrote on Feb. 3.
His argument for buying is that Aurora, under its CEO, is making progress. Using my illustration earlier, its balance sheet is actually stronger than in the past. However, it’s got to deliver more growth on the top line.
For this reason, I wouldn’t recommend its stock until the margin of safety increased and it was trading between $7 and $8.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
