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Should You Buy Cannabis Stock Hexo? “Heck, No!” Says Jefferies


Among marijuana investors, Hexo (HEXO) lacks the name recognition of an Aurora Cannabis, Canopy Growth, or Cronos Group — and according to Jefferies analyst Owen Bennett that’s a good thing.

In a pair of research notes that have issued over the past two days, Bennett makes the argument that despite rising in share price after reporting earnings Thursday, and despite sporting a market capitalization of nearly $1.3 billion, Hexo stock is, in fact, a ‘sell.’ Furthermore, the analyst believes the cannabis stock can fall as much as 30% as he reiterates a C$5.60 price target. (To watch Bennett’s track record, click here)

Hexo’s earnings report yesterday covered Q2 results — and these results fell far short of expectations. Although Hexo reported better than 10x growth in quarterly sales, and narrowed its year-ago quarterly loss, the company’s Q2 sales of C$13.4 million still missed consensus projections for C$15.5 million by 14%. At the same time, the C$6.9 million operating loss that Hexo reported was wider than the C$6.7 million loss analysts had projected.

Surprisingly, these worse than expected results came despite Hexo enjoying stronger than expected pricing on its product. Bennett says the average sales price per gram of marijuana-and-cannabis derivatives sold was C$6.02 per gram, versus the consensus expectation of C$5.20.

Hexo sold 2,689 kilograms of cannabis, and a further 2,249 kg of “oil-based products” — nearly a 50:50 ratio that helped to boost the revenue per gram. Nonetheless, Hexo ended up selling less cannabis in the quarter than analysts had expected, resulting in less revenue than analysts had predicted.

So much for last quarter. What about the quarters to come? In guiding investors on what to expect later this year, Hexo warned that revenues will increase only “minimally” in Q3 (Bennett’s estimates C$15 million), but then double in Q4 (Bennett’s estimates C$28 million). As Bennett points out, though, these two estimates fall 40% and 30% short, respectively, of what analysts have on average been predicting Hexo would sell in Qs 3 and 4.

Or put another way: Hexo just missed sales in Q2 — and it’s promising to miss sales again in Q3 and Q4 as well.

Suffice it to say this is not optimistic news. Nor is Bennett particularly impressed with Hexo’s announcement, one day before earnings, that it has struck a deal to buy rival marijuana producer Newstrike Brands for C$263 million.

Hexo predicts that with Newstrike’s revenue streams added to the mix, it should be able to sell C$400 million worth of — mostly recreational — cannabis products in 2020. This would be nearly twice what Hexo expected to sell on its own, making Hexo’s success in buying Newstrike at a price-to-sales ratio roughly one-fifth of Hexo’s own look somewhat like a stroke of brilliance.

And yet, Bennett begs to differ. Guesstimating a total Canadian recreational pot market size of C$3.5 billion in annual sales that year, the analyst observes that Hexo might have a market share of a bit more than 10%, if the company’s claims of C$400 million in sales are to be believed. However, Bennett says such a result is “unlikely” to happen — especially coming on the heels of back-to-back-to-back sales misses. To the contrary, the analyst predicts we’ll see Hexo’s combined operations yield no more than C$275 million in sales next year, and miss estimates yet again.

No wonder he advises selling.

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