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Aurora Cannabis (ACB): Will Nelson Peltz Save 2020?

Aurora Cannabis (ACB) ended 2019 with an executive shuffle that might have just started. The Canadian cannabis LP is in need of a more streamlined expense structure to survive and thrive until mid-year 2020 catalysts boost the Canadian market. Until then, investors have to wonder if the promises of working with Nelson Peltz on CPG partnerships will ever bear fruit.

Executive Shuffle

Back on December 20, Chief Corporate Office Cam Battley stepped away from the company. Mr. Battley has long been the face of Aurora Cannabis despite not being the CEO or CFO.

The move is an interesting step for a company struggling to reach EBITDA positive. As recent as November 20, the company promoted individuals to the Chief Product Officer and Chief Integration Officer positions.

One has to question if Aurora Cannabis has too many chiefs and the additional costs for a company with revenues far under a $500 million run rate. In addition, CEO Terry Booth and CFO Glen Ibbott will need to take more active roles in promoting the company. In the last earnings call, Mr. Battley was the primary corporate spokesperson followed by the CFO. Both the CEO and Executive Chairman didn’t speak until the Q&A section.

The company has quarterly operating expenses of $67 million and analyst forecasts with gross profits only reaching into the $50 million range far into 2021. The company faces a scenario where revenues won’t reach levels to generate profits at the current operating expense level until maybe two years.

Aurora Cannabis needs to take this executive departure as part of a cost cutting move.

Mr. Peltz

The company signed a partnership with Mr. Peltz back last March. The investment activist has worked with many CPG firms to improve their operations, but Mr. Peltz was normally an activist investor and not a hired consultant.

Another issue is that Peltz signed up for the job via stock options priced far above current market prices. One has to even wonder, if he has the motivation to find Aurora Cannabis worthwhile deals when his 20 million stock options have exercise prices closer to $8 per share.

One has to imagine his firm has the incentive to purchase shares in the open market or rework the original deal before working out a partnership for Aurora Cannabis. Though, the holding of potential inside information might preclude an investment.

Aurora Cannabis is at a financial situation where a strategic investment of several hundred million dollars would help resolve a lot of the financial pressure on the company. The biggest issue is the level of dilution with the stock down to $2 and whether any highly respected CPG firm would even invest down here.

The best solution might be a partnership with a major CPG company wanting to expand in the cannabis sector starting in Canada. As 2020 progresses and Cannabis 2.0 products reach market, somebody should find working with an industry leader as appealing. If not, one has to wonder why Aurora Cannabis brought on Nelson Peltz when just about every other major Canadian cannabis player already has big partnerships.

Takeaway

The key investor takeaway is that Aurora Cannabis has a lot of positive catalysts to play out in 2020, but the company needs to reorganize the firm to reduce operating expenses following the departure of Cam Battley. Once the company gets the business better aligned with market realities, investors can own the stock knowing the catalysts will benefit shareholders.

Consensus Verdict

This troubled cannabis giant certainly has the Street divided, as TipRanks analytics indicate ACB as a Hold. Based on 10 analysts polled in the last 3 months, 3 rate Aurora stock a Buy, 4 say Hold, while 3 recommend Sell. However, the bulls still win out in the bigger picture, as the average price target of $3.49 marks over 70% upside from Friday's closing price. (See Aurora's stock analysis at TipRanks)