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Better Buy: Aurora Cannabis (TSX:ACB) or Hexo (TSX:HEXO)?

Aurora Cannabis (TSX:ACB) (NYSE:ACB) is a household name in the Canadian cannabis industry. The Edmonton-based firm is arguably the most popular pot stock, particularly among millennials. However, a recognizable brand name alone is not a conclusive reason to purchase a stock. There are various marijuana firms looking to catch up or even fly right past Aurora. Hexo (TSX:HEXO) is currently one of the hottest pot stock on the market after making several moves that reverberated throughout the cannabis sector. Which one of these two companies is the better buy?

Core operations

Aurora is currently the leader in medical cannabis in terms of sales. About 54% of the company’s revenues during the second quarter of fiscal year 2019 came from medical cannabis product. Further, Aurora has expanded beyond the Canadian borders just as well, if not better, than any of its competitors. The company recently scored a big win in Germany, which is considered to be the largest cannabis market outside of North America.

The German Federal Institute for Drugs and Medical Devices granted Aurora a license for the domestic cultivation of medical cannabis in Germany. This license should allow the firm to create an even stronger presence in the expanding German market. Medical cannabis products tend to bring in higher margins than do recreational products. By capturing a large portion of the Canadian market share — and successfully exporting its products to important markets abroad, Aurora is setting itself up to become one of the worldwide leaders in this category.

Hexo, on the other hand, is currently focused on the sale of recreational marijuana. About 91% of the company’s revenues came from this segment during its latest recorded quarter. However, Hexo has more tricks up its sleeve. The company has a partnership with Molson Coors Brewing to produce cannabis-infused drinks. This is significant for two reasons. First, cannabis-infused products carry higher margins, and second, this particular alternative use of marijuana is set to become legal in Canada sometime this year.

Production capacity

While a high production capacity is one of the main factors that might lead to oversupply in the cannabis market, pot firms with low levels of production capacity aren’t likely to compete at a very high level. In this department, Aurora is projected to become the leader. Once all is said and done, Aurora should have a production capacity of over 700,000 kilograms per year.

While Hexo is currently lagging behind in production capacity, the company recently acquired Newstrike Brands, a Toronto-based cannabis company. This acquisition should significantly bolster Hexo’s production capacity, as Newstrike has over 1.8 square feet of cultivation space at its disposal. Still, Aurora beats Hexo in this category.

Valuation

It is hard to value cannabis firm at this point, as few of them are consistently profitable. However, a look at their price-to-sales ratios can be instructive. Aurora currently trades at 103.6 times its sales, while Hexo trades at 107.57 times past sales. Both metrics are extremely high, but that should be expected given the nature of the industry. However, Hexo’s price to future sales ratio is currently around five, as the company’s acquisition of Newstrike Brands is expected to make its revenues skyrocket.

Which is the better buy?

While Aurora currently has a more impressive domestic and international presence, a higher projected production capacity, and a better position in a higher margin sub-sector, the firm has also received a lot of criticism for continuously relying on dilutive forms of financing. Despite this inconvenience, however, and despite Hexo’s recent strides in the industry, Aurora still looks to be the slightly better option at the moment.

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Fool contributor Prosper Bakiny owns shares of Aurora Cannabis.

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