The Catalysts That Will Send Cannabis Stock HEXO to New Highs

Though HEXO Corp. (HEXO) isn’t a U.S. multi-state operator (MSO) that offers some of the best investing options in the cannabis sector, the company is one of the few Canadian players rallying to new highs this year. The Canadian cannabis companies got most of the press during 2018, but this company is one of the few with catalysts in 2019 including a key stock uplisting and strong expansion initiatives.

First Harvest

A prime reason that HEXO has rallied to $7 for a $1.5 billion market valuation is the first cannabis harvest from their new 1 million square foot facility in Canada.

The company is approaching full production capacity of 108,000 kg per annum. The Newstrike Brands (NWKRF) acquisition gets the company up to a production target of 150,000 kg per annum once the deal closes.

HEXO only produced 4,938 kg of dried cannabis in Q4 while kg equivalents sold was only 2,689 kg. Even a goal of reaching 150,000 kg in annual production pushes HEXO to a 10-fold increase in cannabis sold each quarter.

Maybe most interesting is the expectation that HEXO can use the deal to save C$10 million in annual synergies. A big par of the fast growth aspirations in the industry has been some wild spending that a more efficient use of capital might provide a long-term advantage.

HEXO ended the January quarter with cash and shot-term investments of C$166 million to provide a solid capital basis for expansion this year.

C$400 Commitment

Along with the Newstrike Brands acquisition, HEXO has a revenue target in excess of C$400 million in FY20 that ends in July. The amount converts to ~$300 million in U.S. dollars.

The company isn’t positioning to become the largest cannabis player in the next couple of years, but HEXO is positioned for substantial growth considering the market valuation of the stock.

The stock has a listed market valuation of only $1.5 billion. The deal offers the Newstrike Brands shareholders 0.06332 shares of HEXO for a valuation of C$263 million. The deal adds about 20% to the share count of HEXO.

In latest reported quarter ending December, Newstrike Brands generated net revenues of C$4.7 million. The number is additive to the C$13.4 million generated by HEXO as a standalone company in FQ2. The combination of C$18.1 million would make HEXO one of the biggest Canadian players in the cannabis industry.

HEXO wasn’t forecasting much in the way of revenue gains in the current quarter, but the company expects revenues to double in FQ4 that ends in July. The quarter should see revenues that top C$25.0 million as the new harvested cannabis supplies reach market.

The uplisting to the NYSE American stock exchange back in January was a crucial move to obtain credibility with major investors. The stock isn’t on the major NYSE exchange, but investors shouldn’t overlook the key of having a four-letter ticker in providing the stock with credibility.

Takeaway

The key investor takeaway is that HEXO has plenty of catalysts for the stock price pushing higher in 2019. The stock is just becoming well known by the stock market.

With a combined market valuation below $2 billion and a revenue target of ~$300 million next FY, HEXO is one of the cheapest Canadian cannabis stocks based on forward revenue estimates. The stock is likely to continue heading higher.