2021 here we come. A new U.S. president and administration on the way, and one deemed favorable to the cannabis industry.
Joe Biden’s November election win was well received by investors of the struggling Canadian LPs, with several names rallying following the results. The specter of legislation at the federal level and the market opening the gates for the Canadian players saw an optimistic industry wide surge.
However, considering the case for one of the poster boys of the Canadian cannabis industry’s struggles, Aurora Cannabis (ACB), Jefferies analyst Owen Bennett is convinced the bear case still holds true.
In a recent business update, the company announced it had rearranged its debt commitments in order to address liquidity concerns. While Bennett believes the issue has been taken care of, the move was not enough to act as a catalyst for a turnaround, with two main concerns driving his bearish thesis.
“One was the potential inability to invest properly given the debt overhang,” the analyst said. “Two was the Canadian top-line outlook being in a period of limbo. The business update has not made us more confident in either area.”
Included in Aurora’s update was the decision to move to a “variable cost structure,” which puts greater emphasis on sourcing supply from a third party, geared toward the company’s value portfolio.
At the time, Bennett thought the decision was “driven by requirements of the debt holders vs what might be best for the top line.”
“We continue to believe this is so,” he said, “And that Aurora was likely required to take actions to preserve cash.”
As for the topline worries, while Bennett is “fully behind the potential cost and margin benefits” of the new strategy, it also adds a new layer of risk and “uncertainty to near-term market share trends.”
Aurora has strong representation in “below premium price segments,” and Bennett believes there is “no guarantee it can ensure quality and consistency as it moves to third-party supply, and therefore as this transition takes place we could see some volatility.”
All in all, the analyst rates ACB an Underperform (i.e. Sell) along with a C$4.59 ($3.61) price target. The implication for investors? A 62% downside over the next 12 months. (To watch Bennett’s track record, click here)
Bennett’s colleagues are on the same page. The stock has a Moderate Sell consensus rating based on 8 Holds and 4 Sells. However, on where the share price is heading, the rest of the Street is less bearish. Going by the C$11.17 ($8.79) average price target, shares are poised to tumble ~8% from current levels. (See Aurora stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
