How Nelson Peltz Could Make Aurora Cannabis A Winner – The Motley Fool

The enthusiasm for marijuana stocks is at its highest level and this buzz has allowed Aurora Cannabis (NYSE: ACB) to expand the operations at a breathtaking pace. As a result, the marijuana growers have a significant share of the Canadian legal cannabis market, fast-growing international operations, and a billion dollar activist on the payroll.

Aurora Cannabis will soon be able to produce 700,000 kilograms of marijuana at a price per gram that its reputable competitors can not compete with. The hiring of a militant billionaire, Nelson Peltz, as a senior advisor might inspire Coca Cola go back to the trading table or another Fortune 500 company to try his luck.

What's great with Aurora now?

Peltz has a lot of experience as a director of international companies with activities all over the world and Aurora is eager to convince at least one of them to take a significant stake in the company. You may remember, Cover growth received $ 4.2 billion from Constellation Brands in exchange for 38% of Canopy's shares. More recently, Altria has collected 45% of Cronos Group for $ 1.8 billion.

The namesake brand of medicinal cannabis products from Aurora is relatively popular in Canada, thanks to the right combination of low prices and a relatively constant quality. Aurora recently acquired Whistler Medical, which gives the company a luxury brand with high profit margins, appreciated by a smaller number of patients who can afford it.

Aurora can produce half a million kilograms of cannabis a year, and production could exceed 700,000 kg in 2020. Aurora's sophisticated automated greenhouses have lower labor costs than most among its peers, which could give the company a long-term advantage in a growing market. crowded.

How Peltz could make Aurora even better

If Nelson Peltz controlled Aurora 's board of directors, he would probably make a major change – it' s about ending a growth strategy at any cost that creates an endless series of events. investments made with money that the company does not manage. to have. Whistler Medical was probably a wise addition, but investing in many businesses in 24 countries on five continents in a few years will probably not benefit long-term investors who are now embarking on Aurora.

Although the stock has risen by 1,940% over the past three years, its market capitalization has increased by 15,840% over the same period to an impressive $ 9.07 billion. To obtain a similar return from recent prices, the company's market capitalization should reach at least $ 175 billion in just a few years, which would give Aurora approximately twice the value General Electric it is today.

Aurora ended the year 2018 with $ 205 million in cash and securities, which means another capital increase is imminent, unless the demand for legal cannabis skyrockets in the first quarter , while prices remain stable or improve.

Why Peltz will not succeed

A Rolodex full of potential new partners and an air of dignity are the main reasons why Aurora is willing to pay Peltz up to 620 million Canadian dollars for consulting services. Until now, the activist and the fund that he manages have revealed no investment in Aurora Cannabis that exceeds the time and reputation of Peltz.

Activist investors all follow the same basic formula of buying underperforming stocks and trying to increase them so that their associated management teams do not agree. In the absence of shares to vote, Peltz will not prevent Aurora from making extremely risky investments.

And after

Aurora has taken what appears to be a strong position in new markets by trying to launch its government-run medical marijuana programs. While Germany tends to pay a much higher cost per gram, it is also the most stringent EU member in cannabis. Generally, prosecutors can not charge anyone with possession of less than 7.5 grams, and anyone can cultivate it for personal use. In Spain, you are allowed to grow cannabis on private property as long as it is consumed by adults in private, which has given birth to dozens of nonprofit Cannabis social clubs that function as shops marijuana.

Stock market enthusiasm knows no bounds, but the odds for Aurora to become large enough to generate remarkable gains from its current starting point are slim. Selling, general and administrative costs were C $ 66.3 million in the last three months of 2018; during this period, the company announced a gross profit of $ 32 million. Given that social clubs and their counterparts across the EU operate with less concern than the Canadian illicit market, it will be difficult to maintain large profit margins for marijuana for medical purposes in the region.

In the last three months of 2018, Aurora has recorded a net loss of $ 240 million and a total loss of $ 405 million after you have taken into account the price movements of other marijuana stocks that are in the market. she owns. In the domestic Aurora market, cannabis prices are contracting and Aurora can only significantly reduce the cost of sales per gram, which has reached $ 2.60 CAD in the last three months of 2018. This means that investors can expect further losses.