BUY ALERT: Aurora
19th September 2018 |
The future is cannabis-infused drinks. I know this because Constellation Brands, Heineken and Molson Coors are developing drinks that will be infused with cannabis’ active ingredient which will deliver a carefully measured hit of the compound to recreational users. That’s a direct response to the decision by Canada to become the first major economy to fully legalise cannabis.
These are all alcoholic drinks brands who have probably concluded that in addition to beers, spirits and mixers there is a no better addend to their businesses than having a toehold in the emerging cannabis market.
Not to be left out, Coca-Cola is in discussions with Aurora Cannabis to take a position in the business. For Coca-Cola this must feel like getting back to its roots. The name of the globally recognised brand originates from two of its most significant original ingredients: extract from coca leaves and kola nuts. Coca-Cola did originally include cocaine in the formula, not a lot but it was definitely part of the original formula.
Public awareness of the damaging effects cocaine can have forced the company to remove it from the formula at the turn of the 20th century. However, then they were probably already aware of the addictive properties of both caffeine and sugar which have helped to sustain the company’s profits and dividend policy for the last century.
Getting into the cannabis market represents singular avenue for growth for the company beyond coke and water. By partnering with Aurora, it is teaming up with a company that has been very active in forming partnerships. Its other distribution partners include MedReleaf, Pedanios, CanniMed, Urban Cultivator, and others.
For example, Aurora was one of the first companies to pair with Shopify so it could sell its product’s online and leverage the platforms online sales network. That’s only the tip of the iceberg in terms of its partnerships.
In R&D Aurora has partnered with CanGenX Biotech, Cann Group Limited and Anandia Labs. For smoke-free products it has partnered with Evelyn Iona, CTT Pharma and HempCom. In growing operations, it has partnered with Ascent, Weekmd, Cann Group Limited, Choom, Radient, Larssen Ltd, CanniMed, Peloton Therapeutics, MedReleaf and Urban Cultivator. In the accessories market it has partnered with Namaste Technologies and CannaRoyalty. In customer engagement, it has partnered with WeedMD and CanvasRx.
What this rapid pace of expansion tells us is the company is positioning itself to occupy a significant position in the growth of the cannabis market where future demand will be higher than it is today. Having a position in all of these business lines highlights the fact that Aurora is vertically integrated. It has the benefit of taking profits from almost every part of the supply chain but also has a lot of operations it needs to keep control of.
The share hit a medium-term peak in January but rallied this week to break its sequence of lower rally highs on speculation Coca-Cola is getting ready to take a position. I recommend buying Aurora Cannabis up to C$15 and have a 12-month target of C$30. That is assuming it can continue to make partnerships, gain market share and attractive additional investment. Over the next three years the share could hit C$100 as the market expands.
The risk with cannabis shares is oversaturation. There is a green rush on right now and every company wants a part of it. Not every one is going to be a success and some will fail. I do not think Aurora will be one of those but it is a risk we need to be aware of not least with some of the smaller companies.
Action to take: buy Aurora Cannabis Inc
Ticker: ACB CN
Current price: as of 19/09/2018: C$12.35
Market Cap: C$11.807 billion
52-week high/low C$15.20/2.65
Buy up to: C$15
12-month target: C$30
Available at Interactive Brokers
All the best,
Eoin Treacy
Investment Director, Frontier Tech Investor
