Last week, Aurora cannabis (TSX: ACB) (NYSE: ACB) announced second quarter results. The company’s income statement failed to meet analyst expectations. However, the company’s sales improved over the previous year. Given the favorable factors in the Aurora cannabis room, should you buy cannabis at these levels? First, let’s look in detail at Aurora Cannabis’ second quarter performance and growth prospects.
Aurora’s performance in the second quarter
Aurora Cannabis posted net sales of $ 67.7 million in the second quarter, which fell short of analysts’ expectations of $ 69.4 million. However, the company’s sales rose 28% year over year, driven by sales growth in consumer and medical cannabis. Consumer cannabis sales rose 25%, driven by strong sales growth in Cannabis 2.0 products.
The company’s medical division saw an impressive 42% growth in both international and Canadian markets. Aided by expansion of its European business and exports to Israel, Aurora’s international medical sales increased 562%.
The company’s adjusted gross margins declined largely due to the underutilization of its capacity as a decision was made to close some of its manufacturing facilities to better match production levels with demand. However, the company took significant steps to achieve positive Adjusted EBITDA as Adjusted EBITDA losses due to higher sales and lower SG&A (selling, general and administrative expenses) from $ 53.1 million to $ 12.1 million. USD declined.
After completing many of its long-term projects, Aurora Cannabis investments decreased from $ 128 million in the year-ago quarter to $ 8.8 million. Excluding capital costs, the company used $ 22.7 million in cash to fund its operations. Given the decline in SG&A and capital investments, the company hopes to see positive cash flows soon. The company’s financial position is also looking good: As of February 10, the company had cash on hand of approximately $ 565 million.
Aurora Cannabis further strengthens its position in the domestic and international medical cannabis markets through its infrastructure, regulatory experience and compliance systems. The company’s management hopes to soon achieve a gross margin of 60% in its Canadian medical business.
Aurora Cannabis operates in the international market and has one of the largest geographical footprints with revenues from 13 countries. In Germany, the company is an established player in the flower category and would like to strengthen its position in the oil market. Meanwhile, the company recently announced that it will expand its operations in Israel, France and Australia to grow sales in the coming quarters.
Additionally, Nielsen has named Aurora Cannabis’s Reliva as the best CBD product in the US. It has expanded the availability of its products to over 22,000 stores. The company’s management also hopes its distribution, regulatory experience, and relationships will expand the THC business once the federal government legalizes cannabis. So Aurora Cannabis’s growth prospects look healthy.
Analyst recommendations and conclusion
Despite the improved performance in the second quarter, analysts remain bearish on Aurora Cannabis. Of the 17 analysts who cover the company, 11 have given a “Hold” rating, while the remaining six analysts have given it a “Sell” rating. The consensus price target is $ 11.16, a possible drop of around 30% from the current share price.
Since Aurora reported earnings for the second quarter, MKM Partners’ Bill Kirk has downgraded the stock from “neutral” to “sold”. However, Cantor Fitzgerald’s Pablo Zuanic raised his target price from $ 17 to $ 18 while maintaining his “neutral” rating.
I was skeptical of Aurora Cannabis’ performance in the second quarter. However, the decline in SG&A costs and the adjusted EBITDA losses are encouraging. As the world approaches medical cannabis in a cheaper and more compassionate way, Aurora Cannabis is well positioned to benefit from the growth of medical cannabis. Amid the recent decline in cannabis stocks, Aurora Cannabis is trading at a 44.2% discount from its 52-week high. Therefore, I believe investors with a three year investment horizon could invest in the stock for higher returns.
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The fool player Rajiv Nanjapla has no position in any of the stocks mentioned.