Hexo Corp and HEXO Stock at a Great Price with Upside Potential

Hexo Corp HEXO Stock dropped significantly in August on news that there was another stock offering to raise capital.  Hexo Corp raised some $140M which was about 40 million shares.  There were some 150M shares outstanding so this was an approximate 30% increase in shares, diluting current shareholders down by 1/3.

On the one hand, there does not seem to be anyone propping up cannabis stocks right now and that is probably one contributing factor to the stock drop; there simply were not enough bids below the stock price.  On the other hand, Hexo stock has a lot of momentum right now with four acquisitions and merges that will propel the cannabis company moving forward.

How does one consider this in the context of an investment?  It’s not easy.  First, you have to look at all potential avenues of where Hexo Corp could be going.  Then, you have to consider risks with Hexo Stock.  And… it involves busting out the 9th grade algebra that you always felt you’d never need in life.  Hexo stock has never been a consideration for me with the my Best Marijuana stocks to buy now.  And, I’m a bit leery of considering Hexo as an investment.  Then again, how much further could Hexo Stock go considering that they have dropped so much and are poised to grow?

Not a question I want to find out the answer the hard way.

Nonetheless, there is one indicator that does point to Hexo Corp HEXO stock as a buy, which I will get into.  If you look at this one indicator alone, and then you consider the future growth of the newly merged companies, while also considering other factors, investing in Hexo Corp is an interesting proposition for some individuals who enjoy the thrill of a little bit of risk.

Hexo Corp HEXO Stock Comparison

Here is how Hexo Corp stacks up to all of the other cannabis companies in the Complete List of Top 100 Cannabis Companies.

  • #18 Market Cap: $520M
  • #89 Revenue Growth Rate: -28.4%
  • #41 Gross Margins: 38.4%
  • #55 Operating Efficiencies: 100.5%
  • #62 EBITDA/Revenue: -54.3%
  • #20 Cash/Debt Ratio: 64.2%

From a comparison perspective, in almost no category is Hexo a solid performer.  The latest quarter saw a decline in revenue that broke a nice upwardly moving revenue picture.  There should be some kind of return to growth of revenue after competition came in and edged out hash sales in Quebec for Hexo.  But, we may not be able to see that because the closing of the three deals will start to show up in revenue for Hexo.

Hexo Stock Financial Data

I wanted to break down the current position for Hexo so that someone can consider this as a potential investment.  But, without any kind of guidance from the three new acquisitions it would be difficult to sort out what could be possible in the future.

Revenue

Hexo Corp had been continually increasing until the latest release:

Hexo Revenue
Revenue: To view Hexo Complete Financial Data visit HEXO Stock page

From the conference call on the latest financial release, Hexo Corp mentions Quebec and competition as the primary reason behind the drop in revenue.  But, they do not necessarily say that there is going to be an immediate rebound with revenue.

So, when you consider the three most recent acquisitions that have occurred there will be an immediate increase in revenues once the numbers from these companies start showing up.  But, I caution that as a rebound.  We will need to see what the individual revenue is for Hexo Corp itself and then the acquired company.  I am not certain how Hexo stock will break that out.

remember, though, Hexo Corp has the #1 spot in several sectors.  That being said, their misadventure in Quebec should tell you that nothing is permanent.

Gross margins

Gross margins were healthy previously but, they have deteriorated since:

Hexo Gross Margins
Revenue: To view Hexo Complete Financial Data visit HEXO Stock page

My last call I was looking at the increasing revenue for Hexo Corp HEXO Stock as a potential opportunity.  But, as you can see, that opportunity sort of dwindled.  It is difficult to see this coming when you see positive momentum and then all of a sudden it evaporates.  Also, despite rising revenues on a quarterly basis, there was a simultaneous slight decline in the gross margin level last quarter.

Operating Efficiencies

Operating efficiencies are a mathematical equation of total operating costs divided over total revenue.  If total operating costs remain the same, but revenue increases, this chart would decline – you want the lowest possible number.  However, just the opposite is also true: If total operating costs remain the same and revenue declines, efficiencies from an operational standpoint decline – this chart goes higher:

Hexo Operating Efficiencies
Revenue: To view Hexo Complete Financial Data visit HEXO Stock page

There is something that I want to point out with regards to this: With the new acquisitions, there is also likely to be declines in operating costs moving forward as the Hexo Corp office takes over all of the operational burdens of the newly combined companies.  But, this will not happen overnight.

So, given a return to increasing revenue and the addition of the three new companies and then subsequent cost cutting, I expect that on a relative basis this chart mathematically declines on its own.  But, Hexo Corp has a ways to go when it comes to getting to ultra-competitive levels.  I am not suggesting that this cannot happen.  I am just saying that it will take a modicum of time.

EBITDA Profits & Net Earnings

EBITDA profitability is one of those metrics that for a company that is still in the process of gearing up, they want to achieve as their goal.  Hexo Corp, the core company, is having a tough time of this:

Hexo EBITDA
EBITDA: To view Hexo Complete Financial Data visit HEXO Stock page

I stress this often as the first thing an investor should look towards for figuring out if a company is a good investment.  This is an important milestone.  If a new company achieves this milestone then, technically, all they have to do is continue increasing revenues and the marginal profits will trickle down the financial statement towards free cash flow and net earnings.

Likely, the combined companies will be able to consolidate some production and cost saving measures that will assist Hexo Corp in achieving EBITDA profitability.  But, I am not sure that necessarily plays out instantaneously.  I would prefer to see continued increases in revenues from all four companies, Hexo Corp, REDECAN, 48 North, and Zenabis along with each achieving EBITDA profitability.  Then, after combining, seeing the company cut costs while continually growing.

Net Earnings

Net earnings have been elusive.  You can see this with the higher gross margins from two quarters ago, this affected net earnings more positively:

Hexo Net Earnings
Revenue: To view Hexo Complete Financial Data visit HEXO Stock page

The burn rate is not terrible and Hexo Corp just raised $150M while also sitting on some cash.  I do not think they have any reason to need to raise cash anymore.

If Hexo Corp can bring the other three companies together and navigate these mergers, while at the same time cut costs, net earnings may be around the corner.

But, I am not ready to jump on that just yet as a rationale for getting in to Hexo Corp.  Instead, I’m looking towards another indicator to show why Hexo Corp HEXO stock is a potential buy.

Book Value Per Share

I consider book value a valuable indicator for investing in cannabis stocks, but, admittedly, I do not focus on it too much.  Regarding Hexo Corp, this is a potential buy signal for someone that is savvy and likes a little risk with their breakfast:

Hexo Book Value
Book Value: To view Hexo Complete Financial Data visit HEXO Stock page

What is Book value?  Book value is basically the fire-sale price of all of the assets of the company and what would be returned to investors if this were to happen.

Book value is sitting at $3.48 as of the latest quarter.  But, now there are two new factors to consider:

  • New Share Count
  • New Cash on Hand

As it turns out, after doing some napkin mathwork, the new book value per share is roughly about the same, if but lower by a modest amount.  Given that, the current stock price for HEXO stock is $2.00.  So, you would be able to purchase Hexo Corp below its book value.

Cash/Debt Ratio

Over the past few quarters Hexo Corp has blown through a bit of cash but, debts have not changed much:

Hexo Cash:Debt Ratio
Cash:debt Ratio: To view Hexo Complete Financial Data visit HEXO Stock page

With three solid acquisitions, Hexo needed cash to manage all of this.  They were not in a bad situation by any stretch with its previous cash/debt ratio.  Now, with a significant increase in cash they will be capable of navigating the merge of all the companies.

Hexo Corp HEXO Stock Chart

As was mentioned, HEXO Corp stock had fallen on the news of the increased shares diluting current positions.

HEXO Stock Chart

On hearing the revenue news, HEXO stock dropped almost 50%:

Hexo Stock Chart
Hexo Stock Chart

Hexo Corp HEXO Chart was trading at about $3.75 when the pressure started and dropped to about $2.00; nearly 50%.  The math on this measures out with shares outstanding and new shares.  But, as I mentioned, there is play in the book value for this stock.

Is Hexo Corp HEXO Stock A Good Buy?

Would I get involved in this stock?  Honestly, it is tempting and I think Hexo Corp is set up nicely.  I believe the stock could probably achieve a significant increase.  With the new share count as well as the new acquisitions, there is a lot of potential.  Unfortunately, without having any guidance with the new acquisitions it is nearly impossible at this point to figure out where HEXO stock could be.

The book value allows for a measure of safety since there is obvious value despite the stock not reflecting that.  This is a type of value investing opportunity where the worst case scenario is that everything gets sold off for the value that is there.  But, I hardly think that HEXO is a likely BK candidate seeing that there are so many upside opportunities.

An Undervalued Marijuana Stock

For a savvy enough operator, this could be tempting and I would likely co-sign that all day long.  I believe that most cannabis stocks are significantly undervalued.  I believe that HEXO stock has the makings to move upwards.

But, I will pass on this for now.  I want to see some new information on this stock in order to make a better determination.  However, I can absolutely see this as an opportunity for those that enjoy a bit of risk sprinkled on their breakfast.

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One thought on “Hexo Corp and HEXO Stock at a Great Price with Upside Potential

  1. Thanks for this interesting analysis!
    One thing that you didn’t focus on and is in my view a big question mark is how will they be able to digest these three big acquisitions. Have you seen any other player in any other industry making three major acquisitions in three months?, and doing this successfully?, let alone a relatively new business in a new industry and a rookie (though full of self confidence..) CEO that has never done this before..
    I think they will screw up these acquisitions, but time will tell. I too am staying on the fence waiting to see where it develops from here.
    Thanks

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