Home Word on the street Valuations Aurora versus Canopy: A Post-Earnings Valuation Update

Aurora versus Canopy: A Post-Earnings Valuation Update

On September 16, Aurora Cannabis (ACB) was trading at 7.26 Canadian dollars. The company’s stock has fallen 14.7% since it reported its fiscal 2019 fourth-quarter earnings results on September 11. In the quarter, the company’s revenue was lower than analysts’ expectation and its guidance. Following Aurora’s fourth-quarter earnings release, P1 Financials, Eight Capital, and Cowen and Company all lowered their price targets on its stock. Yesterday, Stifel Nicolaus also downgraded Aurora to “sell” from “hold” and lowered its price target. All these factors appear to have led to a fall in Aurora’s stock price.

Since reporting its fiscal 2020 first-quarter earnings results on August 14, Canopy Growth (CGC) (WEED) has lost 13.3% of its stock value as of September 16. During the quarter, the company missed both top and bottom line estimates. Following its first-quarter earnings results, Alliance Global Partners, Cowen and Company, PI Financials, CIBC, Canaccord Genuity, and Benchmark lowered their price targets on its stock. Cormark Securities downgraded Canopy from “buy” to “market perform” and also lowered its price target. All these factors led to a fall in Canopy’s stock price. However, on August 26, Seaport Global Securities upgraded the stock from “neutral” to “buy.”

Aurora

Comparing Forward EV-to-sales multiple of Aurora and Canopy

Although Aurora failed to meet analysts’ revenue expectations in its fourth quarter, analysts have raised their revenue expectations for it over the next four quarters.

During Aurora’s fourth-quarter earnings call, its management stated that it had made the required investments to bring cannabis-derived or value-added products to the Canadian market later this year. Management also mentioned that it was in the final stages of receiving Good Manufacturing Practice certifications for its Aurora River and Aurora Vie facilities.

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The company expanded its production and extraction capacities in the fourth quarter. We feel that these initiatives could have prompted analysts to raise their revenue estimates for it over the next four quarters. The decline in its stock price and analysts’ raising their revenue expectations appear to have led to a fall in Aurora’s valuation multiple. On September 16, it was trading at a forward EV-to-sales (enterprise value-to-sales) multiple of 7.43x compared to 12.11x before the announcement of its fourth-quarter results. It was also trading at a lower valuation multiple than its historical average of 10.48x.

Analysts lowered their revenue expectations for Canopy Growth after its weak first-quarter performance. Analysts’ lowering their revenue estimates offset some of the decline in the company’s valuation multiple due to the fall in its stock price. On September 16, the company was trading at a forward EV-to-sales multiple of 9.02x compared to 9.71x before the announcement of its first-quarter earnings. It was also trading at a lower valuation multiple than its historical average of 14.87x.

Aurora

Despite the fall in their forward EV-to-sales multiples, both companies were trading above the peer median of 4.19x. (The median of the forward EV-to-sales multiples of the Canadian cannabis companies mentioned in the chart above form the peer median value.)

Forward EV-to-EBITDA multiples of ACB and WEED

During the fourth quarter, Aurora reported negative adjusted EBITDA of 11.7 million Canadian dollars. However, analysts have raised their EBITDA expectations for the company’s next four quarters following its fourth-quarter earnings results. The raising of the company’s EBITDA estimates lowered its forward EV-to-EBITDA multiple. On September 16, it was trading at a forward EV-to-EBITDA multiple of 29.83x compared to 60.34x before the announcement of its fourth-quarter results. Also, the company was trading at a lower valuation multiple than its historical average of 34.45x.

In the first quarter, Canopy Growth reported EBITDA of -92 million Canadian dollars. Following its wider-than-expected operating losses, analysts lowered their EBITDA estimates for it over the next four quarters. Analysts expect the company to report negative EBITDA of 48.3 million in the next four quarters. On September 16, its forward EV-to-EBITDA multiple stood at -222.27x compared to -4,070.2x before the announcement of its first-quarter earnings. It was also trading lower than its historical average EV-to-EBITDA multiple of 71.93x.

In the graph above, we can see that Aurora was trading above its peers’ median value of 11.2x on September 16, while Canopy Growth was trading at a lower valuation multiple.

YTD stock performances

Despite its recent decline, Aurora has returned 7.1% YTD. On September 16, the company was trading 16.9% above its 52-week low of 6.21 Canadian dollars and 55.3% below its 52-week high of 16.24 Canadian dollars. Aurora is looking at expanding its hemp business in the US. For more information, read Aurora Cannabis Focuses on the US CBD Market.

Canopy Growth stock is trading 0.8% higher this year. Its dismal first-quarter earnings led to a fall in its stock price. However, its CFO spoke optimistically about its growth initiatives at the Barclays 2019 Global Consumer Staples Conference earlier this month. For more info, read Canopy Growth: Key Takeaways from Its Investor Call. On September 16, the company was trading 16.9% higher than its 52-week low of 30.30 Canadian dollars and 51.9% lower than its 52-week high of 76.68 Canadian dollars.

In comparison, cannabis ETFs the ETFMG Alternative Harvest ETF (MJ), and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have returned -1.4% and 1.7%, respectively.

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