Why HEXO Corp Could Be Special
There’s no denying that the legal cannabis industry is firing on all cylinders. But when it comes to share price, pot stocks can still make big swings in both directions. Nowadays, one of the reasons why investors may have second thoughts about putting their money in a cannabis company is the uncertainties associated with the COVID-19 pandemic.
You see, pot companies have only been popular among investors for a few years, so people don’t really know how well they will perform in a recessionary environment. With the coronavirus pandemic sending shock waves across the economy, there is a reason for pot stock investors to be concerned.
And that’s why HEXO Corp (NYSE:HEXO) could be special.
HEXO is a Canadian consumer packaged goods pot company headquartered in Ottawa, Ontario. In Canada, which legalized recreational pot on October 17, 2018, HEXO offers products under its “HEXO Cannabis,” “Up Cannabis,” and “Original Stash” brands. The company also serves the medical marijuana market in Canada under the brand “HEXO Medical Cannabis.”
While HEXO stock is one of the lower-priced pot stocks—it trades at $0.70 per share on the New York Stock Exchange at the time of this writing—the company actually has a solid presence in the Canadian cannabis industry.
HEXO has supply agreements and arrangements with government-run and private-sector retailers in all 10 provinces of Canada, reaching approximately 98% of the Canadian population. In Quebec, the second-largest province in Canada, HEXO has a market share of over 33%. (Source: “Corporate Presentation,” HEXO Corp, March 30, 2020)
As I said, COVID-19 could be a major source of concern for the cannabis industry. But the neat thing here is, while HEXO is yet to report results in this earnings season, its most recent earnings report was for the third quarter of its fiscal-year 2020, which ended April 30.
Considering that, in Canada, the COVID-19-related closures were implemented in late March, we can already get a glimpse of how the company was doing under an unprecedented operating environment for the cannabis industry.
During the April quarter, HEXO generated CA$30.9 million of gross revenue, which represented a 29.8% increase quarter-over-quarter and a staggering 94.3% increase year-over-year. (Source: “HEXO Corp. Reports Third Quarter Fiscal 2020 Financial Results; Net Revenue Up 30% to $22.1 Million, Improved Operational Performance,” HEXO Corp, June 11, 2020.)
After deducting excise taxes, the company earned net revenue of CA$22.1 million, up 30% sequentially and up 70% from a year earlier.
The main growth driver was the company’s recreational cannabis business. In the third fiscal quarter, the amount of recreational marijuana that HEXO sold grew 42% sequentially to 9,338 kilograms (20,587 pounds).
At the same time, the company’s gross margin before fair value adjustments was CA$8.8 million, or 40% of the net revenue from the sale of goods in the reporting quarter. This marked a substantial expansion because, in the prior quarter, HEXO Corp’s gross margin before fair value adjustments was CA$5.7 million, or 33%.
The improvement was driven by lower production costs achieved through improved efficiencies, the automation of packaging activities, and the selection of strains that resulted in decreased labor costs.
For the third fiscal quarter, HEXO had an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of CA$4.3 million, which was 50% narrower than in the second fiscal quarter. The company’s goal is to achieve positive adjusted EBITDA in the first half of its fiscal-year 2021.
In other words, despite the impact from COVID-19, HEXO has grown its business and has improved its financials substantially in the three-month period ended April 30.
Of course, the pandemic is yet to end, and HEXO Corp’s management is cautious about their future expectations. In a conference call in June, Chief Executive Officer Sebastien St-Louis said,
Our plans to achieve adjusted EBITDA positive in the first half of fiscal 2021 or the end of the calendar year will depend on the growth of retail stores in our two largest markets, Ontario and Quebec. It’s difficult to determine the timing of new licenses for new retail stores in Ontario and the build-out of additional stores in Quebec, but we’re very encouraged by the huge progress that both our provincial partners have made.
(Source: “Hexo (HEXO) CEO, Sebastien St-Louis on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, June 11, 2020.)
At the end of the day, it remains to be seen how well the cannabis industry can take the impact of the COVID-19 pandemic.
If HEXO Corp manages to deliver another round of solid results in its next earnings report, it should give market participants a good reason to warm up to HEXO stock.