Shake Up At Aurora Cannabis Sends Investors Diving For Cover

It’s Always Darkest Before The Dawn

The cannabis industry has been under a lot of pressure over the last year. After peaking in the first quarter of 2019 the entire market for cannabis stocks entered a downtrend that still hasn’t seen bottom. The Alternative Harvest ETF (MH) is down nearly 60% in that time and heading lower if the latest news from Aurora Cannabis (ACB) is any indication.

Aurora Cannabis released preliminary 2Q results yesterday and along with it a shake-up of operations that has investors ducking for cover. After the results from Organigram a few weeks ago the news is especially alarming. Where Organigram posted a surprise jump in revenue and break-even operations Aurora is looking at sequential revenue declines and impairments that will erode a billion dollars or more of shareholder value.

It is really no surprise that Aurora is in such a precarious position. CEO Terry Booth has been on an aggressive spending spree in his attempt to assert Aurora’s dominance in the global industry. Falling prey to the hype he himself shares responsibility for, the company paid too much for assets while at the same time Canadian sales did not materialize as expected. Aurora Cannabis is scheduled to report results at the end of next week.

Revenue And Earnings Are A Disaster

Aurora Cannabis is expecting to see revenue for the fiscal 2nd quarter come in between C$62 and C$66 million. This is 52% above the same quarter last year but shows a marked deceleration of growth and is sequentially lower than the previous quarter. Worse, it falls short of the analyst’s consensus target of C$78.8 million, a shortcoming of 15% and that doesn’t impairments related to previous quarters. Counting those Aurora’s revenue will be closer to C$54 million.

Speaking of impairment, the company also highlighted some charges and write-downs to goodwill that could total over C$1 billion. Some analysts think impairments to goodwill could top $2 billion by the time all is said and done. These charges are related primarily to assets purchased in South America and the EU, so there is some hope. The core-Canadian assets are holding their value, once Aurora exits its transformation it will be (theoretically) in shape to produce profits.

Glenn Ibbott, Aurora Cannabis CFO

 "The assets being impaired are predominantly associated with our operations in South America and Denmark, as our estimate of the timeline for substantial growth extends in those markets. Our core Canadian cannabis assets are not impacted by these non-cash asset impairment charges. We believe that the long-term opportunity for Aurora remains very compelling, despite a slower than anticipated rate of industry growth in the near-term. We also believe our approach to rationalizing the business and conservatively improving our balance sheet positions Aurora in a more stable position for sustainable growth going forward."

A Business In Transformation

Along with the preliminary results Aurora Cannabis revealed a transformation plan that starts with a new CEO. Terry Booth will be succeeded on an interim basis by Executive Chairman Michael Singer. Singer will be focused on the short-term turnaround while a search is begun for the next CEO.

The turnaround will center on cost-cutting efforts and balance sheet improvement intended to “better align the business financially with the current realities of the Cannabis market.” What this means is a drastic reduction in SG&A expenses that could top 50% of current costs. The first such moves began late last year when the company unexpectedly listed non-essential assets for sale. These efforts also include the ousting of nearly 500 full-time employees and reduced plans for 2020 CAPEX spending.

The Technical Outlook: Restructuring Was Expected

Shares of Aurora Cannabis fell hard on the news but not as hard as they could have; investors were expecting a restructuring. The initial decline of -20% has been met by buyers who are keeping price action above recent support levels.

The question now is whether Aurora’s actual 2Q results will come in at the high or low end of the range. A miss on top of the weakened guidance could easily send this stock to new lows. A drop below the $1.50 level would confirm the ongoing downtrend and could take the stock down to $1 or lower.

If, and this is a big if, Aurora is able to deliver results that don’t spook investors the outlook for growth is favorable. Aurora has ample cash and liquidity to continue operating until positive EBITDA can be achieved, as soon as the 1st quarter of next year if Aurora’s new projections can be believed. If the restructuring works this could be the bottom in ACB shares prices but it is too soon to tell.