The world’s second most valuable pot stock, Aurora Cannabis (TSX:ACB)(NYSE:ACB), made modest gains on Tuesday after the company estimated its fourth-quarter pot production available for sale will beat its previous guidance report.
The Edmonton-based cannabis firm announced on Tuesday it expects to report for the quarter that ended June 30, 2019, its production available for sale will be between 25,000 and 30,000 kilograms, ahead of previous guidance of 25,000 kilograms.
Aurora also estimates it will report fourth quarter revenues net of excise taxes between $100 million and $107 million. And the company said it expects improvements in gross margins, kilograms of cannabis sold and cash costs per gram produced, but didn’t provide an estimate on those metrics. Additionally, Aurora said it “continues to track toward positive adjusted EBITDA” (earnings before interest, tax, depreciation and amortization).
Although the pot producer’s revenue estimates came in lower than the average Wall Street estimate of $112 million, according to FactSet, shares of Aurora jumped as much as 12 per cent on Tuesday, but finished with a five per cent gain by Wednesday’s close.
Aurora will issue its full set of quarterly and fiscal 2019 results by Sept. 15.
Why Aurora’s estimates matter
With the cannabis industry rocked by a series of scandals and poor earnings reports the last few months, the sector is in need of all the good news it can get.
Aurora’s positive guidance update provided some optimism on Wall Street because the company is the most held cannabis stock and it is expected to be a production leader in Canada. The company’s earnings will be a key industry indicator and watched closely, and its Q4 estimates helped send pot stocks mostly higher on Tuesday.
The Edmonton-based pot producer posted $65.1 million in net revenue last quarter, and at the mid-point of the company’s Q4 estimate, sales are on pace to grow around 59 per cent, a positive number.
Also in the previous quarter, Aurora produced 15,590 kilograms and sold 9,160 kilograms at an average price of $6.40 per gram. If the company posts production of 30,000 kilograms, at the high end of its estimate, it will keep pace with a previous estimate it gave investors of reaching run-rate annual production of 625,000 kilograms.
“Our Q4 2019 guidance highlights Aurora’s continued leadership,” said Terry Booth, CEO of Aurora, in a release. “We set out to be best-in-class cultivators, and through carefully evaluated acquisitions, that vision continues to drive exceptional results today.
Profits may be a ways out for the company
Once Aurora is finished building its largest production facility, Aurora Sun, and all of its 15 grow sites are operational, the company could reach in excess of 700,000 kilograms of cannabis production.
On top of that, the company obtained two outdoor growing licences in B.C. and Quebec, it plans on using as a research site to develop high-quality, low-cost weed.
Being Canada’s leader in pot production provides Aurora with economies of scale, and it’s expected the more its grow facilities come online, the lower it will cost to produce a gram and will lead to higher margins.
But for the time being, even with Aurora expecting to post a positive adjusted EBITDA during the fourth quarter, its not likely the company will post a profit in the near term.
Even with improved margins, Aurora is still expected to burn through cash as it finishes developing its mammoth Aurora Sun facility, on top of the company’s ongoing acquisition sprees that may not be slowing yet.
To make matters worse, Aurora was carrying $3.18 billion in goodwill on its books at the end of March, as the company appears to have largely overpaid for some of its assets. Analysts expect the company will have to writedown the value of some of its acquisitions in the coming quarters, which would ensure Aurora will be seeing red ink for the next while.