HEXO (HEXO) has a lot going for it, as it has 600,000 square feet of manufacturing and extraction facilities ready to go, and an annual run-rate of 150,000 kilograms after it acquired Newstrike Brands.
While its most recent earnings report was a weak one, the company will finish the fiscal year ending next June, with approximately C$400 million in revenue.
With two of its major competitors – CannTrust and Canopy Growth slowing down, it provides an opportunity for the company to grow sales in a less competitive market.
Its major problem at this time isn’t primarily from its competitors, but from Health Canada, which stands in the way of short-term growth and momentum.
Health Canada and derivatives
The short-term outlook for products that generate a higher margin was recently weakened because of Health Canada announcing the first batch of them reaching retail outlets would be pushed back to the middle of December. Originally the launch was expected to come in the middle of October.
Health Canada also said the products, which include concentrates, edibles, infused beverages, and vapes, among others, would be rolled out on a staggered basis, meaning some won’t reach store dispensary shelves until early 2020.
That will hurt the overall potential for HEXO at a time when the distractions now enveloping CannTrust and Canopy Growth present it with the opportunity to sell at higher prices. It should be able to retain some of its pricing power with existing products, but it’s leaving a lot on the table that should have been available in the last quarter of the calendar year.
I’m not saying HEXO isn’t going to rebound from the last earnings period, only that it could have done much better in the last half than it will with the delay of higher margin products being allowed for sale.
With over 600,000 square feet ready for extraction and manufacturing, it will temporarily hold back the potential of HEXO in the short term; especially with revenue, margins and earnings.
The good news is it doesn’t change the long-term prospects for the company, and patient investors should be rewarded.
Canopy Growth and CannTrust
What some in the market aren’t taking into account yet concerning the debacle surrounding CannTrust and the firing of Canopy Growth founder and co-CEO Bruce Linton.
CannTrust got busted for producing and selling non-licensed product, resulting in the company halting sales and distribution until everything is cleared up. And Canopy Growth appears to be taking a more measured approach to growth, which means it isn’t going to be as aggressive as it was in the past.
That opens up an opportunity for competitors like HEXO which will be called upon to fill in some of the supply gap coming from these events and decisions.
This in itself should provide HEXO with more pricing power, but again, it won’t help it with derivative products until it is allowed to sell them.
Conclusion
HEXO recently started trading on the NYSE, which over the longer term, should benefit the company. In the near term a number of its peers didn’t get the boost from doing the same, in spite of the hype, but after a while started attracting more investors.
With its fundamentals remaining in place and several positive catalysts in place that will boost its performance and share price over time, the company is positioned for a nice run over the next 12 to 18 months.
Because of Health Canada’s delay concerning derivative products, it’ll take a little longer for HEXO to get the full benefit of its potential, but once that’s in play, it should surprise many to the upside. That said, investors will have to be patient as it will take time to unfold.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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