An analyst at Cantor Fitzgerald dropped their bearish stance Wednesday on Canadian consumer cannabis company Hexo Corp (NYSE: HEXO).
The Hexo Analyst: Pablo Zuanic upgraded Hexo Corp. from Underweight to Neutral and increased the price target from CA$0.90 (67 cents) to CA$1.25 (93 cents).
The Hexo Thesis: Toronto-listed shares of Hexo are down about 37% since their June 8 peak compared to a 16% decline for the Canadian MJ index, Zuanic said in a Wednesday morning note.
The weakness stemmed from an equity offering and partial bond conversion, the analyst said.
Hexo showed strong underlying sales trends in the April quarter and improving profitability, he said. The cannabis company has a strengthening balance street and cash flow, reducing the risk of further dilution, Zuanic said.
The analyst said he expects the stock to at least perform more in line with the cannabis group.
"We also think the valuation offers some protection, with Hexo trading at the bottom of our LP coverage at 4.7x current sales and 2.5x CY21 FactSet consensus."
Canadian marijuana sales remained resilient through May, especially in Quebec, which accounts for about 80% of Hexo's sales, according to Cantor Fitzgerald.
The industry outlook on store growth, Cannabis 2.0 rollouts and favorable regulatory changes indicate that growth is ahead, Zuanic said.
Hexo has been able to maintain its market share in Quebec while also growing sales at about a 90% rate outside the province, the analyst said.
Cantor sees optionality upside for Hexo shares if Molson Coors Beverage Co (NYSE: TAP) expands the CBD beverage joint venture or takes an equity stake in the cannabis company.
HEXO Price Action: NYSE-listed shares of Hexo were trading down 1.68% at 72 cents at the time of publication Wednesday afternoon.
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Photo courtesy of Hexo Corp.
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