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July 20, 2019, 10:34 a.m. EDT

Aurora Cannabis weighs on sector after BofA downgrade highlights its cash burn

Curaleaf shines on bullish analyst response to GR Cos. deal; Hexo says co-founder is stepping down as chief brand officer

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By Ciara Linnane, MarketWatch


Bloomberg News/Landov
Aurora Cannabis’ management team may need to raise capital soon

Aurora Cannabis shares tumbled Thursday to pull the overall sector lower, after an analyst at Bank of America Merrill Lynch downgraded the stock on concerns about the rate at which it spending cash.

BAML analyst Christopher Carey downgraded the stock to neutral from buy and lowered his price target to $8 from $10, or about 15% above its current trading level. Aurora’s U.S.-listed shares /zigman2/quotes/210559470/composite ACB -1.38%   /zigman2/quotes/203734337/delayed CA:ACB -1.46%  slid 7%.

“Aurora has emerged as one of the best operators in the cannabis sector, with industry leading scale and margins even versus other large peers, and global optionality,” Carey wrote in a note to clients. “However, despite this, and a focus on profit, (positive EBITDA target for the second quarter), it is burning cash and by our estimates could be cash negative by first quarter 2020 (absent financing), namely if a large convertible debenture due in the first quarter stays out of the money.”

Even if it slowed its pace of burning through cash, Aurora will likely need funding some time in the next few quarters, said the analyst. The company has access to about C$100 million ($76 million) in a credit facility, but convertible debt of C$230 million that matures in the first quarter of 2020 will likely need to be paid in cash, barring a steep stock rally, he wrote.

See: Illegally grown CannTrust pot was exported and sold in Denmark

Aurora filed a shelf registration in April that would allow it to raise up to $750 million, but that was meant to help attract a partner or speed up the process of any potential investment.

See also: Marijuana-delivery service Eaze scales back $1 billion ambitions, documents show

Still, the issue isn’t that Aurora will be unable to plug funding gaps. “At this early stage of industry development, when first mover advantage is key (be early, be big), raising capital from a defensive position rather than for untapped opportunities (like US CBD) is less ideal,” said Carey.

See now: Despite marijuana’s calming benefits, parents who use it are more likely to discipline their kids physically

With U.S. expansion a stated core strategy of Aurora management, if debt is added and no partnership agreed, the company may forced to raise equity capital, clashing with management’s other stated goal of slowing the pace of equity dilution, he wrote.

“Upside risk to our call is if Aurora can ink a partnership that brings with it capital,” he said.

Curaleaf shares /zigman2/quotes/205334348/delayed CURLF -0.20%   /zigman2/quotes/203485866/delayed CA:CURA -0.61%  bucked the negative trend to trade up another 5%, as analysts weighed in on its plan to acquire Chicago-based multistate operator GR Companies Inc. for $875 million in cash and stock. The deal, which is expected to close in early 2020, will increase Curaleaf’s presence to 19 states from 12, including Illinois, which legalized adult-use cannabis in June through the legislature. The combined company will have 131 dispensary licenses, 68 operational locations, 20 cultivation sites and 26 processing facilities.

“Together, CURA should now be generating pro-forma annualized revenues of ~$350m, ~50% larger than next its closest peer, and highlighting CURA’s industry leadership position,” GMP analyst Robert Fagan wrote in a note to clients.

The combination is “highly complementary” with limited overlap, he said. Fagan rates Curaleaf a buy and raised his stock price target to C$24 ($18) from C$23, or almost three times its current price.

Akerna Corp. /zigman2/quotes/202667634/composite KERN -5.80%  fell 4%, after the Denver-based software-as-a-service (SaaS) company focused on the cannabis industry disclosed a relatively large sale of common stock by “certain selling stockholders.”

Cannabis Watch: For all of MarketWatch’s coverage of cannabis companies

The company late Wednesday filed a registration statement for the resale of 6,699,766 shares of common stock, in a deal that would be valued at $88.1 million at the proposed maximum offering price of $13.15 a share. Akerna won’t receive any proceeds from the offering, but the number of common shares outstanding will increase by 10.8% to 11,734,570 shares.

Shares of Neptune Wellness /zigman2/quotes/207537677/composite NEPT +5.76% , /zigman2/quotes/203840062/delayed CA:NEPT +5.38%  an extraction company, rose 18% after the company said it has raised $41 million in a private placement with existing and new investors led by Perceptive Advisors. The company issued a total of 9.4 million shares, priced at $4.40 each. Proceeds of the deal will be used to fund the initial payment for the acquisition of SugarLeaf Labs and Forest Remedies LLC, as well as for general corporate purposes.

Hexo Corp. shares /zigman2/quotes/206508254/composite HEXO 0.00%  fell 4.5% after the company said co-Founder Adam Miron is stepping down from his role as chief brand officer, effective immediately. Miron co-founded the company with Chief Executive Sébastien St-Louis in 2013. Miron will remain on the board and will continue to be president of the board of Hexo Med, the company’s Greek unit.

Elsewhere, Cronos /zigman2/quotes/206842762/composite CRON -3.09%   /zigman2/quotes/202715342/delayed CA:CRON -2.71%  was down 2.2%, Tilray /zigman2/quotes/209129655/composite TLRY -1.60% was down 3.3%, and Aphria shares /zigman2/quotes/207425803/composite APHA -4.43%   /zigman2/quotes/205566616/delayed CA:APHA -4.13% were down 2.7%, Green Growth Brands Inc.’s stock /zigman2/quotes/204912440/delayed GGBXF -6.25% was up 0.6% and MedMen shares were down 1.4%. OrganiGram Holdings’s stock was down 7%.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -3.08% was down 1.8%, with 26 of its 38 constituent stocks declining. The Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ -3.35% was down 1.9%, with 38 of its 54 constituent stocks falling.

See now: Zenabis fought short selling financiers in the cannabis industry, but did it win?

The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA 0.00% was down 0.5% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.16% was trading 0.6% lower.

Don’t miss: People in states where marijuana is legal are eating more salty snacks and ice cream

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$ 3.57
-0.05 -1.38%
Volume: 13.59M
Nov. 12, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.72 billion
Rev. per Employee
$94,401
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/zigman2/quotes/203734337/delayed
CA : Canada: Toronto
$ 4.71
-0.07 -1.46%
Volume: 4.72M
Nov. 12, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.92 billion
Rev. per Employee
$123,163
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/zigman2/quotes/205334348/delayed
US : U.S.: OTC
$ 4.94
-0.01 -0.20%
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Nov. 12, 2019 3:59p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.30 billion
Rev. per Employee
N/A
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CA : Canadian Securities Exchange
$ 6.51
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Nov. 12, 2019 3:59p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.05 billion
Rev. per Employee
N/A
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/zigman2/quotes/202667634/composite
US : U.S.: Nasdaq
$ 3.90
-0.24 -5.80%
Volume: 51,385
Nov. 12, 2019 3:59p
P/E Ratio
105.98
Dividend Yield
N/A
Market Cap
$45.37 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/207537677/composite
US : U.S.: Nasdaq
$ 3.12
+0.17 +5.76%
Volume: 1.39M
Nov. 12, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$272.79 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/203840062/delayed
CA : Canada: Toronto
$ 4.11
+0.21 +5.38%
Volume: 367,743
Nov. 12, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$360.64 million
Rev. per Employee
N/A
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/zigman2/quotes/206508254/composite
US : U.S.: NYSE
$ 2.12
0.00 0.00%
Volume: 3.55M
Nov. 12, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$544.86 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/206842762/composite
US : U.S.: Nasdaq
$ 7.83
-0.25 -3.09%
Volume: 11.78M
Nov. 12, 2019 4:00p
P/E Ratio
17.67
Dividend Yield
N/A
Market Cap
$2.76 billion
Rev. per Employee
$55,248
loading...
/zigman2/quotes/202715342/delayed
CA : Canada: Toronto
$ 10.40
-0.29 -2.71%
Volume: 1.32M
Nov. 12, 2019 4:00p
P/E Ratio
17.58
Dividend Yield
N/A
Market Cap
$3.65 billion
Rev. per Employee
$70,780
loading...
/zigman2/quotes/209129655/composite
US : U.S.: Nasdaq
$ 21.57
-0.35 -1.60%
Volume: 3.26M
Nov. 12, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.14 billion
Rev. per Employee
$62,689
loading...
/zigman2/quotes/207425803/composite
US : U.S.: NYSE
$ 4.75
-0.22 -4.43%
Volume: 4.14M
Nov. 12, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.25 billion
Rev. per Employee
$147,410
loading...
/zigman2/quotes/205566616/delayed
CA : Canada: Toronto
$ 6.27
-0.27 -4.13%
Volume: 2.12M
Nov. 12, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.65 billion
Rev. per Employee
$190,843
loading...
/zigman2/quotes/204912440/delayed
US : U.S.: OTC
$ 1.05
-0.07 -6.25%
Volume: 156,693
Nov. 12, 2019 3:49p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$266.60 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/204332491/composite
US : U.S.: NYSE Arca
$ 18.56
-0.59 -3.08%
Volume: 804,286
Nov. 12, 2019 4:10p
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/zigman2/quotes/208856346/delayed
CA : Canada: Toronto
$ 10.10
-0.35 -3.35%
Volume: 221,233
Nov. 12, 2019 3:59p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,691.49
0.00 0.00%
Volume: 213.67M
Nov. 12, 2019 4:53p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,091.84
+4.83 +0.16%
Volume: 1.68B
Nov. 12, 2019 4:53p
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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