CGC versus ACB: Valuation Multiples after Earnings

Yesterday, two of the most prominent players in the cannabis sector, Canopy Growth (CGC) (WEED) and Aurora Cannabis (ACB), reported their earnings. Canopy Growth missed both analysts’ revenue and adjusted EBITDA estimates in its second quarter of fiscal 2020, which caused its stock to fall 14.3% yesterday.

Aurora Cannabis reported its earnings for the first quarter of fiscal 2020 after the market closed. Although the company missed analysts’ revenue estimates, its adjusted EBITDA and net profits beat expectations. The company announced that it would reduce its capital expenditure over the next few quarters due to weaker-than-expected demand for cannabis in Canada and globally. Its announcement that it would scale back its expansion appears to have caused ACB’s stock to fall in yesterday’s after-market hours.

Let’s look at the valuation multiples of both companies after reporting their earnings. For our analysis, we have considered the forward EV-to-sales multiple and the forward EV-to-EBITDA multiple.

Forward EV-to-sales multiples of CGC and ACB

On November 14, CGC traded at a forward EV-to-sales multiple of 5.54x compared to 6.5x before it reported its second-quarter earnings. The decline of 14.3% in its stock price seems to have caused its valuation multiple to fall. However, analysts lowered their revenue estimates for CGC after it reported its second-quarter earnings, which offset some of the declines.

Before CGC reported its second-quarter earnings, analysts expected the company to post revenues of 989.1 million Canadian dollars in the next four quarters. However, after CGC reported its second-quarter earnings, analysts lowered their revenue estimates to 941.5 million Canadian dollars. The weak second-quarter performance and the expectation of slowing cannabis sales might have prompted analysts’ to lower their revenue estimates.

On Thursday, ACB’s forward EV-to-sales multiple stood at 5.9x compared to 6.1x on Wednesday. Yesterday’s 6.6% decline in Aurora’s stock price appears to have dragged the company’s valuation multiple down. The weakness in the cannabis sector due to a disappointing performance from CGC pushed ACB’s stock down.

However, the decline in analysts’ revenue estimates offset some of these declines. On Wednesday, analysts expected ACB to report revenue of 851.0 million Canadian dollars in the next four quarters.

CGC versus ACB: Valuation Multiples after Earnings

After ACB reported its first-quarter earnings, analysts lowered their estimates to 813.04 million Canadian dollars. Analysts lowered their revenue estimates following the company’s announcement that it would scale down its expansion plans. An expectation of a slowdown in cannabis sales also affected these revenue estimates.

On November 14, both Canopy Growth and Aurora Cannabis’s EV-to-sales multiples were lower than their historical averages of 14.87x and 10.48x, respectively. However, the above graph shows that both companies were trading above their peers’ median value of 2.62x on the same day.

Comparing EV-to-EBITDA multiples of CGC and ACB

Yesterday, CGC traded at a forward EV-to-EBITDA multiple of -50.9x compared to -65.56x before the announcement of its second-quarter earnings. The fall in the company’s stock price appears to have caused the company’s valuation multiple to fall.

However, after Canopy Growth reported its earnings, analysts lowered their EBITDA estimates for the next four quarters. They cut their estimates from -98.0 million Canadian dollars to -102.45 million Canadian dollars. The expectation of increased operating expenses could have prompted analysts to lower their EBITDA estimates. Notably, analysts lowering their EBITDA estimates offset some of the declines.

CGC versus ACB: Valuation Multiples after Earnings

ACB’s forward EV-to-EBITDA multiple also fell from 33.6x to 31.6x after it reported its first-quarter earnings. The decline in the company’s stock price might have caused its valuation multiple to fall. However, analysts lowering their EBITDA estimates after Aurora’s first-quarter earnings offset some of these declines. Before ACB reported its earnings, analysts projected the company to report EBITDA of 152.31 million Canadian dollars. However, they lowered it to 151.78 million after its first-quarter earnings.

On November 14, both Canopy Growth and Aurora Cannabis traded below their historical average EV-to-EBITDA multiples of 71.9x and 34.51x, respectively. From the above graph, we can see that ACB was trading above its peers’ median value of 8.61x on the same day, while CGC was trading at a lower valuation multiple.

YTD stock performance

So far in 2019, we see weakness in the cannabis sector. Year-to-date, the ETFMG Alternative Harvest ETF (MJ) has fallen by 31.1% through November 14. Meanwhile, the S&P 500 Index has increased by 23.5% year-to-date. The vaping-related deaths, thriving black markets, and lower-than-expected earnings appear to have dragged the sector down. During the same period, CGC and ACB lost 42.7% and 35.4% of their stock value, respectively.

To learn more about CGC and ACB please read Canopy Growth: An Overview of the Cannabis Giant, and Aurora Cannabis: Company Overview. Also, please visit 420 Investor Daily for more marijuana-related news.