Aurora Taps Internal Candidate for CEO, Investors Wanted Someone External to Clean House
Aurora Cannabis (TSX:ACB, NYSE:ACB) announced their new CEO yesterday (September 8th). Miguel Martin is an internal appointment, who ran Aurora’s cannabidiol company Reliva.
He joined Aurora in July as its Chief Commercial Officer and will take the helm on a permanent basis from CEO and founder Terry Both who vacated the title earlier this year.
The internal CEO appointment has generally been viewed as disappointing by investors, Jefferies analyst Owen Bennett stated it bluntly: “The fact that he was given the CEO role so soon after (joining the company as chief commercial officer) would suggest limited availability of suitable (or indeed interested) parties externally.”
More Write Downs, More Problems
The company announced a corporate update on its business operations and included some preliminary results for the fourth quarter of 2020. Aurora is anticipating non-cash write-downs for this quarter of up to $1.8 billion worth of goodwill impairment charges. Aurora is also expecting to write off $90 million of production assets and $140 million worth of inventory.
This comes with news of the end of Aurora’s partnership with the Ultimate Fighting Championship (UFC), the world’s premiere mixed martial arts organization. The partnership was intended to assist with clinical research regarding the correlation between CBD products and pain management, recovery, and mental well-being for athletes.
At the time of the partnership, Aurora was anticipating that the Food and Drug Administration (FDA) would have greater progress on CBD regulations, however COVID-19 and other factors have changed the landscape.
The dissolution of the partnership comes at a cost – with Aurora making a one-time payment of $30 million to terminate the contract next year. Aurora claims that this allows them to avoid $150 million fees, expenses, and marketing costs over the next 5 years.
Investors should note that this firm has a history of over-promising and under-delivering. One of the issues that has plagued Aurora is excessive deal-making. Mergers and Acquisitions (M&A) can often be a clear path to profitability by benefiting from economies-of-scale and is a sign of the maturation of a firm or vertical. However, M&A can harm the acquirer if the asset(s) have fails to meet expectations.
This has been the case with Aurora’s $1.1 billion hostile takeover of CanniMed Therapeutics and the $3.2 billion acquisition of MedReleaf Corp. which both occurred in 2018. These overpriced acquisitions along with general mismanagement have damaged Aurora’s share price, the stock is down over 90% decrease in the last year.
Aurora’s Valuation Still Not Compelling vs. Peers
Even with the stock down 90% over the last year, Aurora’s forward price-to-sales ratio is higher than Aphria and Organigram, two companies that have been far better run on a relative basis.
Canopy Growth and Cronos remain valuation outliers in the group, we believe the excessive valuations of these two companies will continue to correct in the coming quarters.
Aurora Projects Muted Results in the Coming Quarter
Aurora expects its net revenue in this quarter to be between $70 million and $72 million, down from $75.5 million in the previous quarter and below analyst consensus estimates of $76 million.
Cannabis net revenue is expected to be between $66 million and $68 million, also down compared to $69.6 million in Q3 2020.
Aurora will announce it’s full fourth quarter results on Tuesday, September 22nd; at that time investors will have an opportunity to hear directly from the new CEO Miguel Martin about the path forward for the company.
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