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Post-Earnings Weakness in HEXO Stock Is an Opportunity to Buy

support@smarteranalyst.com (Ben Mahaney)

HEXO (HEXO) is trading down big after putting up a quarter where net revenues declined from the previous quarter.  The company is still in the transition phase from ramping up cultivation capacity to getting the product on market.

The cannabis company remains on track for a big breakout year in FY20 so any stock weakness following FQ3’19 results is likely a buying opportunity. The stock market has moved to the phase of where investors want to see a big jump in actual cannabis results and HEXO won’t start providing those numbers for another quarter or two.

Focus On Catalysts

HEXO reported that net revenues decreased to C$13.0 million for the period ending April 30 from C$13.4 million in the January quarter. The big key to the revenue dip was the drop in the average gross selling price for adult-use dried grams to C$5.29 from C$5.83.

The roughly 9% dip in selling prices made a huge impact because HEXO is still in the process of ramping up cannabis production. The company only sold a fraction more dried cannabis equivalents in the quarter, but the production levels nearly doubled to 9,804 kg. The time to market will always cause harvests to show up in sales for the following quarter.

With the completion of the Newstrike Brands deal on May 24, HEXO is now on pace for 150.000 kg of annual production. The company still needs to grow quarterly production by another 270% in order to reach full capacity.

The company only sold 2,904 kg of cannabis equivalents in the quarter leaving a greater than 10-fold increase in sales within the next year or so. HEXO just completing their first harvest in their expanded 1 million sq. ft. facility.

The only major negative with the quarter and the current plan is that the company has a weak medical cannabis business. The quarter continued to see flat kg sold in the 150 range despite stable average selling prices of over C$9 per gram.

HEXO saw a substantial boost in operating expenses going from C$4.6 million last April to C15.9 million this quarter. The end result was an adjusted operating loss in the C$10.0 million range. The C$10.0 million synergies from the Newstrike Brands acquisition combined with improved efficiencies should get the company back into the black.

Big Target

The Canadian cannabis company continues to forecast a FY20 revenue target of C$400 million or about $300 million. A big part of the plan is to use the Newstrike Brands business along with a hemp supply agreement for 200,000 kg of hemp to sell CBD products such as edibles in Canada and other products in eight U.S. states in 2020.

HEXO recently hired the past CFO of Nutrisystem to focus on the U.S. based financials showing the importance of the U.S. market to future growth.

The two-pronged growth path and the move to get away from pure farming via the hemp supply agreements should improve margins next year. The company will grow quarterly net revenues from slightly above C$10 million to around C$100 million per quarter in the matter of a few months from now with the next fiscal year starting on August 1.

Takeaway

The key investor takeaway is that HEXO remains on track for a huge year in FY20. The market is likely underwhelmed by the FQ3’19 revenue dip, but the investors paying attention will see the opportunity to own the stock on any weakness.

After the current quarter that ends in July, HEXO is lined up to generate sequential revenue gains in excess of C$20 million. With a market value close to $1.5 billion, the stock should find support in the $6 range.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

 

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