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Tuesday, November 24, 2020

Should You Buy Hexo Corp (NYSE:HEXO) After The Recent Earnings?

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Hexo Corp (NYSE:HEXO) has been one of the important players in the cannabis industry for quite some time but the company’s latest earnings report, published last week, was a disappointment.

The revenues for the third quarter did not meet analysts’ estimates and in fact, it dropped from where it stood in the preceding quarters. Naturally, the stock started tumbling and dropped on both Thursday and Friday last week. It is apparent that investors went into a bit of panic with regards to the company’s future, but experts suggest that the overall picture is quite different.

Weak Earnings

Earlier this month, the HEXO stock plunged by as much as 8.5% in a single day. It recorded revenues of C$ 13.8 million, which was significantly short of analysts’ estimates of C$ 14.8 million. However, Hexo did manage to beat analysts’ estimates of 5 cents loss per share, but recording loss per share of 4 cents for the quarter. Although revenues dropped alarmingly by as much as $400,000 from one quarter to the next, the company managed to raise its sales volume 10 times on a year on year basis.

Now, HEXO may not be in the same league as some of the giants of the industry like Canopy Growth, Cronos Group or Aurora Cannabis, but it has several factors that could work in its favor.

Hexo operates out of Quebec, which is the second biggest province in Canada and in this populous province; the company has managed to capture 30% of the market.

Moreover, Hexo has also struck a 5 year deal with the province that will see it supplying 200,000 kilos of cannabis to Quebec over that period. Additionally, the acquisition of Newstrike Brands is also set to raise the company’s production capabilities to 150,000 kilos per year.

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Cannabis Infused Beverages

Last but not least, it has also struck a partnership with Molson Coors to produce cannabis-infused beverages. It is a market that could explode in the coming years.

Analysts believe that despite the poor show in the latest quarter, its overall revenues record has remained strong. They expect Hexo to generate revenues of C$ 319.4 million in 2020. To put it into perspective, analysts’ estimates for HEXO’s revenues in 2019 stands at C$ 62.62 and they expect the company to grow considerably in a year. Hence, it is believed that the latest drop in the stock price appears to be a bit of an overreaction and the company’s strong forecasts could still see it becoming one of the bigger players in the cannabis industry.

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Disclosure: we hold no position in $HEXO, either long or short, and we have not been compensated for this article.

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