Aurora-Cannabis

Aurora Cannabis (NYSE, TSX:ACB) 2019 and 2020 outlook.

Aurora Cannabis (NYSE, TSX:ACB)

 

Aurora Cannabis (NYSE, TSX:ACB) is a Canadian producer and distributor of medical cannabis. In terms of market capitalisation, it is the world’s second largest cannabis company after Canopy Growth. With an ever-increasing revenue, reduced costs, and positive projected financials, Aurora’s future is that of rapid growth. ACB also ranks #1 on our Cannabis poll.

Background

Aurora Cannabis is a medical cannabis producer and distributor. It is a Canadian licensed company with authorised production and sales operations in more than 20 countries. The company is listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the ticker symbol ACB.

Aurora was initially founded in 2006 in Mountain View County, Alberta, where it established its first production facility. Later, it became the first federal government licensed cannabis-growing company of the province in 2014. In November same year, it received the license from Health Canada to grow and market medical cannabis. The company has its headquarters in Edmonton, Alberta.

It uses a business model which emphasizes vertical integration and horizontal diversification. Consequently, it continuously strives to reduce reliance on suppliers, lower costs and improve its economies of scale. Also, its operations are significant ranging from facility design and engineering, cannabis genetic research, cannabis, hemp, and derivatives production.

Therefore, it has opportunities to benefit from growth in every part of the industry’s value chain. Leveraging that, it has been able to develop an unparalleled international reach advantage. Currently, Aurora has an estimated peak production capacity of up to 700,000 kilos.

Industry Overview

Classified as a health care company, Aurora is specifically in the cannabis industry. Experts do not always agree on choices of investment. However, it seems they all agree on the immense potential of the medical cannabis industry.

The legal cannabis industry is the fastest-growing industry in the United States. The industry has two major segments: the recreational/adult use and medical markets. Analysts expect recreational use to account for approximately 67% of the growth while medical use will contribute the rest. Recreational cannabis is already legal in nine American states while medical marijuana is legal in 33.

Interestingly, the largest cannabis companies in the world are Canadian. The most contributory factor to this is the country’s cannabis-friendly stance. Ontario-based Canopy Growth, with its market capitalisation of approximately $23 billion, is clearly the largest in the industry. Tilray, Aurora, and Scotts Miracle-Gro follow it.

The Canadian companies have also been infiltrating the American cannabis industry by making substantial investments in US-based marijuana firms. They can more easily expand than their American counterparts because they face lesser regulatory hurdles and are more flush with cash. With the projected compound annual growth rate of 26.6%, perhaps, there is no other industry that matches the growth potential of the legal marijuana industry.

Aurora Cannabis: Benefitting From Massive Industry Growth

Presently, cannabis stocks are wildly popular, especially among millennial investors. After delivering $6.9 billion in global sales in 2016, the industry was able to grow this by approximately 38% in 2017. For 2018, the industry posted an estimated $12.2 billion in revenue, a figure that has been projected to rise by 38% to $16.6 billion for 2019.

In short, generally, the cannabis industry is of a good prospect. Revenue is expected to be on a consistent increase. Consequently, its companies will grow and their stocks will generate significant value for their investors. However, a cannabis company that wants to thrive must focus on key business fundamentals such as financing, product diversity and differentiation, and strategic partnerships, among others. Aurora Cannabis is doing just that.

Strategic Partnerships: The Primary Driver of Aurora’s Growth

Aurora actively seeks to expand. Its expansion strategy based on vertical integration and horizontal diversification is a sound one. Anandia Laboratories, the global industry leader in cannabis testing and research, is its wholly-owned subsidiary. Also, Agropro UAB, Europe’s largest producer and supplier of certified hemp, is another. Moreover, Aurora announced its acquisition of Farmacias Magistrales, a Mexico-based medical cannabis firm, in December 2018.

Aurora, through its policy of strategic acquisition, is also the owner of Pedanios GMBH, now Aurora Deutschland. Pedanios GMBH is Germany’s largest supplier of medical cannabis to pharmacies, with over 750 pharmacies supplied. CanvasRx, BC Northern Lights, CanniMed Therapeautics, and Borela UAB are some of the other companies Aurora has long acquired.

The latest of Aurora’s strategic partnerships, its “exclusive, multi-year, multi-millionaire, global partnership” with the Ultimate Fighting Championship (UFC) to advance cannabidiol research, came through on May 21, 2019.

Diversified Product Offering And Consumer Recognition

Aurora arguably has the most diversified product offerings in the industry. Little wonder that the brand-consumer recognition is strong, having fast outpaced its peers. Currently, the company markets its adult consumer products via the four main and active brands: Aurora, Altavie, San Rafael’71, and Woodstock.

Of course, these two factors are vital drivers of its growth, and will continue to boost its revenue in the coming years. Add to this its rapid product diversification through acquisitions, research and development, and strategic partnerships. As a result, you will conclude that Aurora’s prospect for the future is that of rapid growth.

Healthy Financials Confirm Positive Outlook

By the end of Q1 2019, Aurora Cannabis (ACB) has gained approximately 83% while the S&P 500 appreciated only by 15.5%. Over the past two years, Aurora Cannabis has appreciated by 326.4% compared to the 24.3% gained by the S&P 500 during the same period. Despite sustaining a loss in 2017, the company closed 2018 in the green.

With a market capitalisation of approximately $8 billion, Aurora (ACB) currently hovers around $8. For 2019, it has posted a YTD appreciation of approximately 70%. With a projected P/E ratio of 85.8×, its upward potential is still high, leaving room for opportunities to mount the ride.

Summary

Yes, the cannabis industry has become widely favoured. However, you should take note that regulatory restrictions in different countries can reasonably impede its growth. We believe the optimistic views of most analysts on it will pan out nevertheless.

Specifically, Aurora’s business model of vertical integration and horizontal diversification is a huge competitive advantage. It pursues aggressive growth, thereby rightly positioning itself to profit across all the segments of the value chain. Moreover, the management has shown its commitment to disciplined cost management.

Also, its production facilities, both old and new, working at peak yield will significantly ramp up manufacturing capacity. Plus, becoming EU GMP (Good Manufacturing Practices) certified will boost its European market share.

Consequently, with increased revenue, reduced costs, and positive projected financials, we expect Aurora to continue its positive run. Hence, every intelligent investor should consider a buy.

 

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