Analysts’ recommendations for HEXO​

After the company’s dismal third-quarter earnings, analysts downgraded the stock. Analysts’ estimate shows how they think the company is doing in terms of profitability.

Notably, CIBC downgraded HEXO to “neutral” from “outperform” and reduced the target price to 8.5 Canadian dollars from 9.5 Canadian dollars. Oppenheimer also downgraded the stock to “perform” from “outperform.”

According to Cantech Letter, Beacon Securities analyst Russell Stanley is very optimistic about HEXO’s growth after its third-quarter results. The analyst thinks that HEXO could benefit from more diversification. Stanley was happy that the company’s net revenues of $13.0 million beat his estimate of $10.2 million.

Stanley has a positive outlook for HEXO for fiscal 2019. He expects the revenues to be around $63.2 million. Meanwhile, he expects a negative EBITDA of $30 million. For fiscal 2020, the analyst expects HEXO’s revenues to be $450.0 million with a positive EBITDA of $157.2 million. Stanley gave HEXO stock a target price of $14.0.

Previously, I discussed how the EBITDA is a good measure of profitability. A negative EBITDA tells you that a company’s operational costs are higher than its income.

Despite challenging times in the cannabis sector, Aurora Cannabis (ACB) expects to generate a positive adjusted EBITDA from its cannabis operations. The news keeps investors’ confidence intact in the evolving cannabis industry. Read Aurora Cannabis: What’s the Word on the Street? to learn more.

Analysts’ fourth-quarter estimate 

Analysts expect HEXO’s revenues to be around 25.5 million Canadian dollars for the fourth quarter—higher than the same period the previous year. They also expect HEXO to report a loss of 0.05 Canadian dollars per share in the fourth quarter, which is in line with the fourth quarter of 2018. Analysts expect the company to report a negative EBITDA of 8.2 million Canadian dollars—lower than the same period the previous year. The gross margin could be higher at 45.9% compared to 50.3% in the fourth quarter of 2018.

What to expect in fiscal 2019 

For fiscal 2019, analysts expect HEXO’s revenues to be around 59.6 million Canadian dollars—higher than the same period last year. Analysts also expect the company to report a loss of 0.17 Canadian dollars per share for 2019, which is in line with 2018. Analysts expect the company to report a negative EBITDA of 32.7 million Canadian dollars, which is lower than the same period last year. The gross margin could be higher at 48.5% compared to 50.3% in the fourth quarter of 2018.

How did HEXO perform in the third quarter?

In the third quarter, HEXO reported net revenues of 13 million Canadian dollars, which was higher than 1.2 million Canadian dollars in the third quarter of 2018. Higher adult cannabis use sales drove the net revenues. HEXO fell below analysts’ estimate of 14 million Canadian dollars. The company reported a net loss of 0.04 Canadian dollars per share, which was higher than 0.01 Canadian dollars per share a year ago. The net loss was driven by higher operating costs. HEXO reported a negative EBITDA of 1.9 million Canadian dollars and a gross profit margin of 47.3%.

Meanwhile, Aphria (APHA) reported a positive EBITDA of 0.2 million Canadian dollars. The company reported a profit of 0.05 Canadian dollars per share in the fourth quarter. Canopy Growth (CGC) (WEED) reported a negative EBITDA of 92.06 million Canadian dollars for the first quarter of 2020. The company reported a net loss of 0.30 Canadian dollars per share in the first quarter of 2020.

What’s the plan ahead?

During the earnings call, HEXO’s management stated that the company is on track to double its revenues in the fourth quarter. The company expects to generate $400 million in net revenues in fiscal 2020. HEXO also plans to ramp up to 108,000 kilograms of annual full production capacity.

The company mentioned during the earnings call that it’s all set when Canada’s second wave of edibles legalization hits the market next month.

A leadership change in many of the cannabis companies has worried investors. Soon after the earnings results, HEXO’s co-founder, Adam Miron, stepped down as the chief brand officer.

Canopy Growth’s CEO, Bruce Linton, stepped down in July. Meanwhile, Aphria’s CEO, Vic Neufeld, stepped down in January. CannTrust’s (CTST) (TRST) CEO was also terminated due to the company violating regulations.

Stock price movement

At 10:13 AM ET, HEXO stock rose 0.96% today. The stock has fallen 23.5% since its inception. Since the earnings results, the stock has fallen 31.8%. HEXO stock fell 5.6% in August. The lower stock price impacted the stock’s valuation multiple. Meanwhile, Canopy Growth, Aurora Cannabis, and CannTrust stock have fallen 27.7%, 12.0%, and 25.9%, while Aphria has risen 16.3%.

HEXO’s price coverage 

Currently, 15 analysts cover HEXO stock. Three analysts recommended a “strong-buy” for the stock for the next 12 months. Around eight analysts recommended a “buy,” three recommended a “hold,” and one recommended a “strong sell.” The target price is set at 10.37 Canadian dollars, which represents an 85% upside potential for the stock.

What investors should watch

We look forward to HEXO’s fourth-quarter results. The company hasn’t announced the date for the earnings results yet. Investors are eager to see if the fourth-quarter earnings can kick off the stock.

Recently, I discussed how regulations could benefit the cannabis industry. Lighter regulations lead to scandals, which impacts a company’s reputation and the stock price. The Horizons Marijuana Life Sciences ETF (HMMJ), which tracks the North American cannabis industry, has fallen lately. HMMJ fell 12.9% in August and 1.4% YTD.

We expect more presidential candidates to support marijuana legalization. On Tuesday, I discussed that President Trump reiterated his administration’s stance on cannabis legalization.

Stay tuned with us for cannabis players’ latest outlook updates and cannabis legalization news.