source: Seeking Alpha
Aurora Cannabis (OTCQX:ACBFF) has a lot going for it as the macro elements in the industry are favorable to the company, even as its strategy is paying off for shareholders, evidenced by its latest quarter, where it produced some great numbers.
With its large production capacity, the upcoming legalization of cannabis in Canada, the announcement it will soon be listed on a major U.S. exchange, its improved performance, and growing interest from large companies outside the sector, I believe Aurora Cannabis could at least double by the end of 2018.
Revenue in the 2018 fiscal fourth quarter came in at $19.1 million, up 19 percent sequentially, and 223 percent year-over-year, beating the $18 million in revenue generated for all of fiscal 2017.
Full-year revenue was reported at $55.2 million, up over 200 percent over 2017, with revenue from cannabis accounting for $42.8 million of that, a gain of 169 percent.
Medical cannabis gross margin jumped to 74 percent, up from the 58 percent in the same reporting period last year. The company attributed that to higher dried cannabis prices and a improved product mix that included more oil products that enjoy higher prices. Oils sales accounted for over 31 percent of revenue in the reporting period, up 20 percent from the prior quarter.
The average net selling price of dried cannabis per gram for full-year 2018 increased from $6.47 last year to $7.65 per gram.
Cash costs of sales and production fell by 11 percent year-over-year.
The number of active registered patients soared by 164 percent from fiscal 2017.
Although the numbers didn’t include MedReleaf because it was acquired near the latter part of July, the company did add them in to give an idea of what overall results really were. Including MedReleaf, revenue would have surpassed $33.1 million.
Taking into account those numbers and the boost coming from recreational pot sales in Canada starting on October 17, it’s obvious the first quarter of fiscal 2019 is going to be a huge one for Aurora.
Also significant is the fact the company is starting to scale production at the most opportune time. Management said it has adequately prepared to supply the growing demand for medical and recreational marijuana.
Improved gross margins, lower costs, and increased demand are all coming together at a time the company is adding production capacity.
Cost per gram
The cost per gram in the latest quarter was a mixed bag primarily because of the weak results coming from CanniMed, which has had efficiency problems before it was acquired by Aurora.
Consequently, in the fourth quarter cost per gram for dried cannabis was up by $0.17. Even with that, on “a standalone basis, Aurora’s cash cost per gram declined to $1.35 from $1.53 in the prior quarter.”
Since taking over CanniMed, the company has continue to make improvements, stating in the first fiscal quarter of 2019 it has already increased yield at CanniMed by 30 percent. That will drive down cost per gram going forward.
The major catalyst for overall improvement on a standalone basis was its Mountain facility, which experienced lower utility costs during the cold months while boosting productivity.
The company guided for cash costs to produce a gram to drop “well below $1” once Aurora Sky comes online and is operating at full-scale.
Implications of major listing and recreational pot
In the short term almost all Canadian-based cannabis stocks are going to enjoy the benefit of the upcoming legalization of pot in the country. In the case of Aurora Cannabis, not only will it be a good investment for traders in the short term, but even a better one for the long term when considering falling costs and increased production capacity.
Add in the expected listing on a major stock exchange in the near future, and that should further leverage the results of the company in anticipation of a lot more interest from investors.
One other factor that deserves mention is the reported interest by Coca Cola in the infused drinks market. While it’s probable these were nothing more than early exploratory talks, the most important thing to take into account is the growing interest in large companies outside the cannabis sector.
Of the many cannabis companies, I see Aurora Cannabis being one of the most desirable partners sought after when considering its future production capacity and its growing global footprint. In the long term its international sales will probably far surpass Canadian sales. This is huge when considering the drink, tobacco and big pharma companies are looking for new market sectors to take a position in. Very few offer what Aurora Cannabis does in regard to potential scale or reach.
Once it lands some partnerships with big businesses, it’ll be another huge catalyst that isn’t priced in at this time. I expect as demand cannabis demand climbs, Aurora Cannabis will be on the top list of companies looking to enter the market and secure deals with reliable partners that can deliver product consistently at scale.
When taking into account listing on a major exchange, sales from increased demand from recreational pot in Canada, expanding global footprint, improved gross margins, soaring sales, declining costs, and interest from large companies to enter into partnerships with them, I see Aurora Cannabis having a lot of room to boost its share price in the near and long term.
The key is it has been able to position itself about as good as it can to take advantage of the market conditions presenting themselves to the company. Considering it has been able to perform so well while growing organically and via significant acquisitions, it’s impressive to see the results it’s starting to produce; they’re going to get a lot better.
As good as the short-term outcome will be as a result of increased sales from recreational pot in Canada, the real value of Aurora Cannabis is its transition to high-margin products, medical cannabis, and its strong entry into important international markets.
With capacity being built out and costs dropping, it’s positioned to win in almost any circumstance that presents itself to the company. It could take on partners, land more deals outside of Canada, rapidly scale production at some of its facilities, or make some more strategic acquisitions.
With its expected upcoming listing, legalization of recreational pot in Canada, and supply that is ready to meet its obligations, I believe the company could double its share price by the end of the year. If it lands some big partnerships during that time, it could even surpass that lofty potential in the near term.
Even so, the value of Aurora Cannabis is its long-term potential. It’s one of the few cannabis stocks that could be bought and held in my opinion, without fears of it plummeting in value.
I believe publicly traded cannabis companies have a lot more room to run, and Aurora Cannabis is one of a few of those companies that should be able to do so sustainably.
For the reasons mentioned above, I think it’s time to get into Aurora Cannabis before it soars higher. In the not-too-distant future I see $10 per share being far in its rear view mirror.
Disclosure: I am/we are long ACBFF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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