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MKM Partners Downgrades ACB and CGC

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As noted by MKM Partners, yesterday Aurora Cannabis (ACB) fell by 4.97%. It closed at $4.78 Canadian dollars on TSE. The stock was down by 4.99% and closed at $3.62 on NYSE. Also, Canopy Growth (CGC) fell by 5.19%. It closed at $26.85 Canadian dollars on TSE. Canopy Growth was down by 5.41% and closed at $20.30 on NYSE.

The CDC (Centers for Disease Control and Prevention) recent announcement highlighted the potential role of Vitamin E acetate in the vaping crisis. Investors considered this to be a good sign for the legal cannabis sector. Thereafter, cannabis stocks rallied on November 8. However, most of the cannabis stocks lost the gains on November 11.

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MKM Partners lowers ACB and CGC target prices

MKM Partners’ analyst Bill Kirk started coverage for Aurora Cannabis in September, as reported by The Fly. Then, he had a “Sell” rating for the company and a target price of $5 Canadian dollars. In October, the analyst retained the “Sell” rating for ACB. But, he reduced the target price to $3.50 Canadian dollars. On November 11, Bill Kirk reiterated his “Sell” rating for Aurora Cannabis. He maintained ACB’s target price of $3.50 Canadian dollars.

Bill Kirk started coverage for Canopy Growth in September, as reported by The Fly. Then, he had a “Neutral” rating for the company. And he had a target price of $33 Canadian dollars. On November 11, the analyst reiterated the “Neutral” rating. However, he reduced the company’s target price to $30 Canadian dollars

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MKM Partners’ past opinions about ACB and CGC

In September 2019, Bill Kirk explained that excessive supply can hurt both ACB and CGC. The analyst was concerned about ACB’s exposure to the medical marijuana segment. This, he believes, can limit the company’s growth prospects. Also, Kirk believes that ACB will need to raise more capital before it reports positive EBITDA.

In October, Kirk highlighted pricing concerns for Aurora Cannabis. He was concerned about the increasing gap between the prices of legal and illicit cannabis products. Also, the analyst is worried about slower-than-anticipated store openings of the company in Quebec and Ontario.

In September 2019, Kirk highlighted the possibility of CGC continuing to invest at current levels. This would be required for targeting future growth opportunities. Unlike the consensus, Kirk doesn’t expect CGC to become profitable by the end of fiscal 2022.

However, he has high hopes about the role of Constellation Brands in improving Canopy Growth’s efficiency. Also, the analyst highlighted Constellation Brands’ stake as a “Valuation backstop” for the company.

MKM Partners reduced ACB and CGC’s revenue estimates

On October 14, as reported by MarketWatch, Bill Kirk reduced Aurora Cannabis’ sales estimate for the first quarter of fiscal 2020 from $117 million Canadian dollars to $98 million Canadian dollars. The revised revenue estimate was lower than the then consensus estimate of $105 million Canadian dollars.

On November 11, Kirk further reduced ACB’s Q1 sales estimate to $92.2 million Canadian dollars. However, this estimate is higher than the consensus estimate of $89.7 million Canadian dollars. Also, the analyst reduced Canopy Growth’s Q2 revenues from $114.5 million Canadian dollars to $95.4 million Canadian dollars. The new estimate is lower than the consensus estimate of $101.5 million Canadian dollars.

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Kirk attributed the downward revision in sales estimates partly to the inventory stocks held by the provinces. This shrunk the total shipments from ACB and CGC. Also, the analyst highlighted ongoing pricing pressures on regulated cannabis players. Despite pricing pressures shrinking the companies’ topline, regulated cannabis products are priced at a big premium to illicit products. Thus, the price decline hasn’t led to market share erosion of the black market.

ACB’s earnings estimates are reduced

On November 11, as reported by MarketWatch, Bill Kirk questioned the possibility of ACB becoming EBITDA-positive by the end of June 2020. The analyst explained that flat or reducing sequential revenue growth and an increase in planned costs is affecting the companies’ profitability.

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