With Hexo’s (HEXO) next earnings report lined up to be released next week, here’s a snapshot into what we could expect.
Looking back at the company’s most recent fiscal Q3 earnings, the results weren’t too bad. However, the earnings still failed to measure up to analysts’ expectations in terms of per-share profitability.
Hexo sold less than 3,000 kilograms of cannabis last quarter, which doesn’t seem like a lot when compared to industry giants who sold closer to 10,000-plus kilograms during the same period.
But keep in mind that HEXO is a small cap stock, so it’s not so surprising that it would be harder for their production to compete with large cap rivals like Aurora Cannabis (ACB) and Canopy Growth Corp. (CGC).
Last quarter, HEXO’s sales volume rose 9% compared to the prior quarter. Again, when compared to the double-digit-percentage growth rates that many of its cannabis peers have been delivering, some investors may not be that impressed.
In Q2, Hexo’s net revenue dipped quarter-over-quarter, and its net loss widened.
During these first two fiscal quarters, the company generated roughly $20 million in sales. This can be problematic for investors because of the company’s $1.08 billion market capitalization.
Because the revenue generated is low when measured against the company’s market cap, it’s indicative of Hexo’s operating and net loss for the business, which also translates to a free cash flow deficit.
In other words, HEXO has had a negative draw on its cash each quarter.
Nonetheless, the company’s balance sheet is still showing $130 million in cash.
And while the Hexo’s cash and current assets have diminished year-over-year, the company’s liabilities are still small in comparison. With current assets at nearly $200 million (including the $130 million in cash), the current liabilities of $35.4 million don’t seem to cause much concern for investors.
Still, the $10 million in quarterly revenue compared to the company’s nearly $1 billion stock valuation means a higher valuation, which has many investors proceeding with caution.
Hexo’s strategic partnership
It’s important to note Hexo’s strategic partnership with Molson Coors (TAP) to launch Hexo’s non-alcoholic line of cannabis-infused beverages under the brand name Truss.
Clearly, with Molson Coors’ scale and infrastructure, this puts the Truss brand on solid footing.
Molson Coors received warrants as part of the agreement, but the partnership is structured as a joint venture. Molson Coors owns 57.5%, while Hexo owns the remainder.
This is meaningful because it limits Molson Coors’s control over the entire organization. Molson Coors’s warrants give it the right to buy 11.5 million shares at a price of $6 per share. With 256.9 million shares outstanding, and 50.9 million warrants outstanding, this gives a lot of control to Hexo.
Another area of Hexo’s business worth paying attention to is its commitment to edibles, vapes, wellness products and cosmetics. As cannabis flower becomes more commoditized, it’s wise for Hexo to pursue these other cannabis product categories which deliver higher margins.
Hexo is Quebec’s biggest supplier, and the company’s recent acquisition of Newstrike Brands helped scale up its cultivation infrastructure.
Hexo stock is currently trading below $5 per share, down nearly 50% from its peak in April 2019.
HEXO Corp. (HEXO) was trading at $4.61 per share on Friday afternoon, up $0.10 (+2.22%). Year-to-date, HEXO has declined %, versus a 12.14% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of ETFDailyNews.com.
About the Author: Eric Bowler
Eric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.
