<p>Terry Booth resigned on February 6 as CEO of Aurora Cannabis (NYSE: ACB) and the Aurora share fell 29% during several days of news trading. Since then, some of these losses have recovered, but are still well below $ 2.
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It would be unfair to say the company’s shares were only cratered due to Booth’s resignation. The write-down of their assets of $ 1 billion and the dismissal of 500 employees also put investors in a selling mood.
It will be difficult to find a quality manager
Like Bruce Linton at Canopy Growth (NYSE: CGC), it’s never good when a person with such an influence on a company’s founding is shown the door, but if the company wants to pull out of the hole it dug for itself, the board had to go in a different direction. .
In January, I reflected on the idea that Aurora would have a new CEO. It was not an original idea, remember. It came from Cantor Fitzerald’s analyst Pablo Zuanic, who felt that Aurora’s management team had swelled up and needed a major overhaul, including the replacement of Booth.
I felt that Booth could have remained as non-executive chairman to help find his replacement. A less painful goodbye, if you will. The board, of which Booth remains, felt the patch had to come off quickly. President Michael Singer has taken over as interim CEO. It will be his job to find the right candidate, perhaps with the help of strategic adviser Nelson Peltz and the board.
It will not be easy.
MKM Partners analyst Bill Kirk, who has a “neutral” rating and a $ 1.32 price target on the Aurora stock, weighed in recently and said “Aurora will have a hard time attracting the talent needed to build investor confidence. . “
It is not difficult to understand why.
Aurora ended the second quarter of 2020 with net sales of CAD 131.3 million during the first six months of the year, a loss of CAD 197 million, CAD 156.3 million in cash and a debt of CAD 273.3 million. Aurora also has CAD 271.1 million in convertible debenture loans that pay 5.5% interest every six months.
It’s not the worst thing I’ve ever seen from a company with a market capitalization of $ 2 billion, but they are up there. The current Altman Z score is 0.55. Everything below 1.81 indicates that a company has a good chance of applying for bankruptcy within the next 24 months. Excluding any miraculous turnaround in their revenue and operating losses, it will only get worse before it gets better.
Last August, I suggested three names, including former Nike (NYSE: NKE) CEO Mark Parker, as possible replacements for Linton. Constellation Brands (NYSE: STZ) chose to join one of its own and appointed CFO David Klein as CEO of Canopy Growth.
At least Canopy Growth had plenty of cash, so it might take time to find a successor to Linton. I’m not sure Aurora has any luxuries.
The conclusion on Aurora Stock
As I stated in January, Aurora needs Nelson Peltz to step on the plate and help it get through this troubling period in the company’s history. Investor confidence is at an all-time low and there do not appear to be any quick fixes other than those announced on 13 February.
Analysts are divided on what awaits Aurora. Some, like Eight Capital’s Graeme Kreindler, are cautiously optimistic.
“[Booth’s departure] signals the ongoing maturity of ACB and the entire sector from its entrepreneurial roots to an industry that continues to prioritize disciplined cash flow management and return on capital, ”Kreindler wrote in early February. “[Booth’s replacement ] will have experience of leading a global company and a track record of allocating capital in strategic initiatives. ”
Others are not as safe.
“While we do not see Mr. Booth’s departure in isolation as a concern, we have, following disappointing FQ1 results, increased headwinds in the industry and now surprisingly dampened expectations of Aurora’s remaining FY20, making significant downward changes to our model,” Canaccord said. Genuity analyst Matt Bottomley.
However, there is agreement among most analysts covering Aurora that a significant cut is needed to recoup costs relative to its revenue structure. That process is ongoing.
In the coming months, investors will find out who Booth’s replacement is. Unlike Canopy or the Cronos Group (NASDAQ: CRON), it does not have well-funded partners to lend a hand.
At best, Aurora is a speculative purchase. I would not touch on it until some of the questions facing the company, including finding a new CEO, have been answered.
Until then, all games are suspended.
Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia.
At the time of writing, Will Ashworth had no position in any of the above securities.