Aurora Cannabis Inc. stock is set to go to $1, according to two analysts.
In a note to clients late Thursday, Piper Sandler analyst Michael Lavery downgraded the cannabis producer to the equivalent of a sell and issued a $1 target price, down from $3. Lavery cited risks related to the balance sheet and weak European Union sales as significant factors.
Aurora /zigman2/quotes/210559470/composite ACB -2.58% /zigman2/quotes/203734337/delayed CA:ACB -3.37% shares closed down 11.3% to $1.65 Friday, making it the lowest close for its U.S.-listed stock since July 2017.
Lavery wrote that his team does not expect Aurora to achieve positive cash flow from operations until the third quarter of fiscal 2021 and projects a cash deficit of C$200 million ($152.9 million) in the interim. The struggling weed company will also have to refinance C$360 million worth of debt due in August 2021, which would leave it C$800 million in debt and with C$30 million in cash in the second quarter of fiscal 2022.
Aurora could opt to take “more significant austerity measures” and consider “asset sales” to improve its cash position, Lavery wrote.
In a note to clients Friday morning, Bank of America Merrill Lynch analyst Christopher Carey downgraded Aurora to the equivalent of a sell rating, citing unresolved balance sheet problems that overshadow Aurora’s strong position in the recreational cannabis market in Canada.
Carey wrote that his team doesn’t believe Aurora is “in a position” to meet the terms of its C$400 million credit facility and that the Alberta, based company has the weakest balance sheet among the names he covers. Because of valuations in the sector, Carey wrote he expects a number of write-downs in 2020, which make it unclear whether the company would remain within the credit facility’s terms. Its debt-to-earnings before interest taxes depreciation and amortization also may present an issue given the analysts’ projection of a full-year Ebitda loss of roughly $150 million.
Through 2019, weed companies with more than a year’s worth of cash on hand performed far better than companies with less cash than that. Names such as Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -3.35% /zigman2/quotes/202205609/delayed CA:WEED -3.48% Cronos Group Inc. /zigman2/quotes/206842762/composite CRON -5.34% , /zigman2/quotes/202715342/delayed CA:CRON -5.89% and Aphria Inc. /zigman2/quotes/207425803/composite APHA -2.30% /zigman2/quotes/205566616/delayed CA:APHA -1.73% fared better than Aurora, Hexo Corp. /zigman2/quotes/206508254/composite HEXO -3.82% /zigman2/quotes/200008967/delayed CA:HEXO -2.89% and Tilray Inc. /zigman2/quotes/209129655/composite TLRY -4.16%
Beyond the problems with its financing, Aurora’s Germany sales have also been placed on hold because the company is waiting on regulators there to grant an additional authorization related to its sterilization process, Lavery wrote.
“Aurora built its large capacity in Canada with expectations to export a significant amount internationally, but these sales have been very slow to materialize,” Lavery wrote. “German sales have been its highest priced and highest margin products, so the suspension of sales there hurts its revenue and margin mix.”
There is good news in the form of the derivative cannabis market in Canada — vaporizers, edibles and other forms of cannabis other than flower and oil became legal in December. Though sales are off to a slow start, Lavery wrote that Ontario will likely open more stores, which should boost sales. Alberta, where Aurora has a strong presence, has postponed the sale of vape products indefinitely.
Carey also wrote that Aurora is in a strong position in Canada, second behind Canopy and capturing roughly 19% of total industry sales.
Aurora stock has lost 65.9% of its value in the past year, as the S&P 500 index /zigman2/quotes/210599714/realtime SPX -3.03% gained 27%.