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How Low Does Aurora Cannabis Need to Go Before the Marijuana Stock Is a Buy?

By Keith Speights - Mar 15, 2020 at 8:01AM

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It's complicated.

Nearly everything has a price at which it's a good deal. That's true whether we're talking about cars, houses, or stocks. Of course, the less desirable a given item is, the lower the price is where it makes sense to buy it.

That leads me to Aurora Cannabis (ACB 7.75%). There's no need to sugarcoat it: Aurora is a hot mess right now. It's losing money big-time. It's looking for a new CEO. Its stock has lost more than 90% of its value over the last 12 months.

How low does Aurora have to go before the marijuana stock is a buy? It's complicated.

Image of a cannabis leaf at the center of a circle of question marks piled on top of each other

Image source: Getty Images.

The biggest problem

There's one glaring problem for Aurora that arguably outweighs all of the company's other problems -- its debt. Aurora reported current loans and borrowings of close to 300 million in Canadian dollars as of Dec. 31, 2019. But add to that the company's nearly CA$302 million in convertible debentures and Aurora's total debt stands at around CA$602 million. 

If times were good for Aurora, those convertible debentures wouldn't be too much of a concern. Holders of the senior convertible notes issued by the company would be likely to convert those notes to shares if Aurora stock was steadily rising. That's not the case right now, though. Unless something changes, Aurora is going to have a huge amount of debt to pay over the next few years.

In the past, Aurora has done what many other companies do when convertible debentures mature: It issued new convertible notes with expiration dates farther in the future to pay off the old notes. However, taking this approach becomes increasingly more difficult the lower Aurora's share price goes. 

To make matters worse, Aurora remains unprofitable and could need to raise more cash in the future to fund operations. Sure, the company intends to meet positive EBITDA thresholds beginning in fiscal 2021 Q1 as part of its restructured debt covenants. However, positive EBITDA isn't the same as true profitability. Also, there's no guarantee that Aurora will be able to do what it says it will do.

From trash to treasure

Let's assume, though, that Aurora can make significant progress toward profitability. There are some reasons for optimism on that front. Aurora has taken steps to cut expenses, including announcing major staff cuts. The situation is dire enough that the company has no choice but to implement strict fiscal discipline.

Also, Aurora's revenue should rise. Ontario is issuing more licenses for retail cannabis stores, at least partially alleviating a major obstacle for Aurora and its peers. The Cannabis 2.0 market for cannabis derivatives products is picking up momentum. Aurora CFO Glen Ibbott stated in the company's Q2 conference call last month that 20% of Q3 sales will likely be from Cannabis 2.0 products.

Remember, too, that Aurora took a big revenue hit in the second quarter because its license in Germany's medical cannabis market was temporarily suspended. The company's European sales should improve going forward now that this license has been restored.

What would happen if Aurora's sales soar and its bottom line improves significantly? I suspect that its stock would rebound nicely. And that would help the company in addressing its debt-related issues.

A guesstimate

No more beating around the bush (or cannabis plant). It's time to attempt to answer our central question of how low Aurora's share price needs to go to make the stock a compelling buy. At best, all we can do is make a guesstimate, but here's my take.

In an absolute worst-case scenario where Aurora goes bankrupt and shuts its doors, buying the stock wouldn't be a smart move even if its share price went to one penny. But I don't think that's going to happen.

Could Aurora declare bankruptcy in the future? Yes, it could. However, my expectation is that if that occurred the company would file for the Canadian equivalent of a Chapter 11 bankruptcy in the U.S., where the company is restructured but remains in business. My view, though, is that it won't get to that point. None of Aurora's creditors want that outcome, because they'll lose a ton of money.

The property, plant, and equipment item on Aurora's balance sheet totals close to CA$1 billion. Aurora's market is currently close to the reported value of its physical assets. My view is that if the stock falls another 15% to 20%, there's a solid case to be made for buying the beleaguered stock even if the near-worst scenario happens. 

Does it have to really go that low? Probably not. Aurora remains a top cannabis producer in terms of capacity and market share. It also has a low cost structure thanks to its high-tech production facilities. The cannabis market in Canada and Germany, two markets where Aurora already ranks as a leader, continue to grow. It's entirely possible that the answer to how low Aurora needs to go to make it a buy could be as low as it is right now. 

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