Is Aurora Cannabis a Good Buy in October?

On October 25, Aurora Cannabis (ACB) was trading at 4.99 Canadian dollars, which indicates a fall of 14.3% since the beginning of the month. The company is also trading at a discount of 63.5% from its 52-week high of 13.67 Canadian dollars. ACB stock is trading at a premium of 8.7% from its 52-week low of 4.59 Canadian dollars.

The weakness in the cannabis sector and analysts’ target price cut appear to have lowered the company’s stock price. Recent vaping-related deaths, the expectation of slow revenue growth in the second half of 2019, and the thriving black market have weighed on the sector’s sluggish performance.

So far in October, Aurora has underperformed the broader equity market and its peers. During the period, its peers Canopy Growth (CGC) (WEED), Aphria (APHA), and Cronos Group (CRON) have returned -6.0%, 5.8%, and -2.3%, respectively. During the month, the S&P 500 Index has risen 1.5%.

Analysts’ estimates for Aurora

On October 10, HEXO (HEXO) provided lower-than-expected preliminary revenue for the fourth quarter of fiscal 2019. The company also withdrew its guidance for fiscal 2020.

The company’s management blamed the slower opening of new stores, delays in regulatory approvals, and pricing pressures for weak sales. These factors have impacted the entire cannabis industry. As a result, these industry-specific risks appear to have prompted analysts to lower their revenue expectations for Aurora.

On October 25, analysts expected Aurora to report revenue of 522.1 million Canadian dollars in fiscal 2020. This was approximately 59 million Canadian dollars lower than what analysts had projected on September 30. Analysts’ new estimates represent year-over-year revenue growth of 110.6%.

During the same period, analysts also lowered their adjusted EBITDA estimates from a loss of 35.4 million Canadian dollars to a loss of 40.5 million Canadian dollars. The lowering of these revenue estimates could have prompted analysts to lower their EBITDA estimates as well. Compared to the previous year, the company’s adjusted EBITDA represents an improvement of 74%.

Analysts’ recommendations

This month, four analysts have lowered their price targets for Aurora Cannabis. Cowen and Company cut its price target from 12 Canadian dollars to 8 Canadian dollars. MKM Partners reduced its price target from 5 Canadian dollars to 3.5 Canadian dollars.

PI Financial lowered its price target on Aurora from 12 Canadian dollars to 7 Canadian dollars, and Jefferies cut its price target from 14 Canadian dollars to 7 Canadian dollars. Since last month, analysts’ consensus price target has fallen from 10.10 Canadian dollars to 8.06 Canadian dollars. The new consensus price target represents a 12-month return potential of 61.6% from 8.06 Canadian dollars.

Of the 16 analysts that follow Aurora Cannabis, 43.8% favored a “buy” rating. Also, 43.8% recommended a “hold” rating, and 12.5% favored a “sell” rating.

Let’s look at analysts’ recommendations for Aurora’s peers:

  • For Canopy Growth, 50% of the 20 analysts that follow the stock rated it as a “buy.” On October 25, the company was trading at a discount of 61.3% from its price target of 46.02 Canadian dollars. For more on this, please read Canopy Growth: Analysts’ Target Prices and Ratings.
  • Analysts are bullish on Aphria, and 75% of the 12 analysts that cover the stock rated it as “buy.” Analysts have a consensus price target of 12.96 Canadian dollars, which implies a return potential of 78%.
  • Analysts favor a “hold” rating for Cronos Group. Of the 12 analysts that follow the stock, 58.3% rated it as a “hold.” Analysts have a consensus price target of 8.06 Canadian dollars, which implies a return potential of 61.6%. For more, please read Cronos Group: Analysts’ Target Prices and Ratings.

How does Aurora’s valuation multiple look?

The 14.3% decline in Aurora’s stock value has lowered its valuation multiple. On October 25, the company was trading at a forward-EV-to-sales multiple of 10.4x compared to 10.9x on September 30.

The reduction of the analysts’ revenue estimates appears to have offset some of the declines in Aurora’s valuation multiple. The company continues to trade lower than its historical average of 45.9x. Despite the recent fall, Aurora is still trading at a higher forward-EV-to-sales multiple compared to its peers’ median value of 9.0x.

On the same day, peers Canopy Growth, Aphria, and Cronos Group were trading at forward-EV-to-sales multiples of 13.9x, 3.17x, and 30.0x, respectively.

Should you consider buying Aurora?

On October 3, Aurora Cannabis provided an update on its growth initiatives and its global operations. In association with CTT Pharmaceutical Holdings, the company introduced CTT’s cannabinoid-infused sublingual wafers in Canadian markets on October 8.

On October 25, the company’s medical business received some support from the preliminary findings by the University of Saskatchewan. This research study showed that Aurora’s CanniMed 1:20 could effectively lower or cure seizures completely in young patients.

Along with these factors, the opportunity created by Cannabis 2.0, the second phase of legalization in Canada, could drive Aurora’s stock price. Given the weakness in the cannabis sector, however, investors might want to wait until Aurora posts its first-quarter earnings next month. For analysts’ expectations from Aurora’s first-quarter earnings, please read Aurora Cannabis: What to Expect from Its Q1 Earnings.

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