Hexo Corp HEXO Stock Forecast & Analysis

Hexo Corp. HEXO stock going to be acquired by Tilray, TLRY stock. I wanted to update the analysis I have here.  I expect that this may be one of the last times I look at Hexo as it is stand-alone.  So, getting the HEXO stock forecast and price target will help in establishing what could happen with Tilray going forward.

Like most cannabis stocks, nothing appears to be supporting HEXO stock at this point.  But, that also appears to be the story with many other cannabis stocks despite the potential of cannabis federal legalization just moments away.

Hexo Corp. has taken more losses this quarter after what could be its 12th incarnation of restructuring.  Still, despite the change in leadership, the stock continues to drop.  When you put the merge of Tilray and Hexo together, it makes a great deal of sense and expands Tilray’s footprint into Quebec, an oddly regulated province for cannabis.  But, what stands out to me is the book value for Hexo which may make Tilray’s acquisition alluring.

Hexo has assets.  Hexo is one of those cannabis stocks that will likely do very well in the wake of cannabis federal legalization in the United States.  Being a Nasdaq-Listed cannabis stock, many will want to get into this stock.  But, Tilray may finish the acquisition prior to cannabis federal legalization.  Let’s see when that occurs.  Nonetheless, Nasdaq-Listed stocks are very likely to do well because of the sheer volume of individuals that could trade the stock.

HEXO Corp. & Developments

The first thing to note is that Hexo Corp. is based in Quebec.  Quebec is the province in Canada that is always trying to secede from Canada.  Because of that little bit of built-in anarchy, Quebec has passed its cannabis laws to state that all cannabis products sold in Quebec must be produced in Quebec.

Given that, any cannabis company with a license to produce and sell in Quebec is a valuable resource in order to gain access to the Quebec market.  Quebec is, of course, the second biggest province in Canada.

New Management

In a recent move, Hexo Corp. is pushing through with new management.  They are in the process of laying off 180 people after a very large write-down. ^[1]Hexo Corp writes down major loss and lays off 180 employees This is yet another move to get numbers to cash-flow positive.

But, if you look below at Hexo Corp.’s actual numbers, they are a long way away from cash flow positive.  And, I do not see how this equates to a solid cannabis investment at this time despite these kinds of moves.

For now, a recent acquisition may get Hexo Corp. closer to EBITDA profitability.

Redecan

In September, Hexo Corp. completed its acquisition in Redecan.^[2]Hexo Corp should achieve EBTIDA profitability with the recent Redecan Acquisition but, debt service may challenge viability  This is expected to push Hexo Corp.’s numbers to EBITDA profitable and, that may actually be something interesting when you look at the full picture.

Unfortunately, we have yet to see the full incorporation of Redecan’s numbers into the financial data.  But, the next quarter is likely to give us a better understanding of where this cannabis stock could be.

Molson Brewing

A while back, when cannabis stocks were just beginning to emerge in Canada, Molson Brewing created a joint venture with what is now named Hexo Corp.^[3]Molson Brewing creates a joint venture with Hexo Corp. & has a 57% stake in the joint venture.  Molson also has the option to acquire HEXO stock should it push above CAD$6.00 written in to the joint venture.

This was back in 2019 when a few other breweries were venturing into cannabis stocks with joint ventures.  This venture has not necessarily turned into anything of true value up to this point.

Hexo Corp Financial Data

This data is from the latest financial release.

Hexo Gross Profits

The general trend with revenues is higher for Hexo.  Despite increasing revenue, Hexo Corp. has negative gross profits and negative gross margins.

In order to calculate gross profit, you merely subtract costs of goods from total revenue.  Then, to get to gross margins, you divide that remainder over total revenue.  This is one of the most basic things for anyone trying to analyze any cannabis stocks.  And, anyone would instinctively assume that you spend less money to produce a product than you sell that product for (Giving a cannabis company a positive gross margin).

The good people up in Canada that are running Hexo Corp. must not have received that memo.

If there is one thing I have learned after analyzing so many cannabis stocks it is this: It is very difficult to grow excellent cannabis inexpensively, and do so consistently.  This may be one of the things that is plaguing Hexo Corp. right now and a burden on HEXO stock.

Hexo Operating Profits

In the next section of the financial statement, you see operating costs.  While producing cannabis products involves cost of goods, running the businesses from the upper offices involves operating costs and the potential for operating profits.  This is where Sales, General, & Administrative (SG&A) costs are found.  Obviously, you need to have some structure for running a business.

But, whatever that structure is, the costs of this must be at a level where a company can turn a profit.  Therefore, below total revenue would be a good start.  Hexo Corp. has not achieved that.

I see this a lot when it comes to cannabis stocks.  Companies thought they would ramp up sales & revenues quickly and that they achieve profitability just as quickly.  And, so, these cannabis stocks took on very big levels of operating costs.  Granted, “Sales” is in operating costs and you have to have a sales team to sell products.  Also, “Administrative” is in there and, a cannabis company needs to be led by some team.

However, all too often, operating costs are above revenue, and revenue growth has not grown fast enough to scale up via economies of scale in order to overcome these costs.

This acts as a lead weight to cannabis stocks.

Hexo EBITDA & Net Profits

There is an expectation that Hexo Corp. could achieve EBITDA profitability this year after its Redecan acquisition ^[4]Hexo to Achieve EBITDA profitability after Redecan acquisition.  However, that may be fleeting as there is a debt servicing level of some $360M.

Again, we will see more after the Redecan deal starts showing up in HEXO Stock financial data.

Hexo Cash On Hand

For now, Hexo Corp. has some $35M in cash on hand.  But, they also have a burn rate that is continually eating away at its cash on hand.  At the same time, on a ratio basis, Hexo Corp. has a low amount of total liabilities versus what cash they do have.  You can see this in the charts above and, compared to other cannabis stocks, Hexo Corp. is on the top half of the list.

Still, the burn rate is problematic.  A burn rate is usually stated in terms of months and it is the amount of cash burnt by the company because of net earnings losses.

Hexo corp & Burn Rate

The burn rate is a bit of a problem for Hexo Corp.  First, you have to start at the top and work your way down the financial statements.  As pointed out above, Hexo Corp. is spending a great deal of capital on producing products.  Gross margins are not even positive.

After gross margins, you get to the operating profits.  Operating profits are the net result of total revenues less cost of goods & operating costs.  This is really close to EBITDA profits. So, you could look at EBITDA to see how long cash on hand will sustain a company.

Hexo Corp. is nowhere near EBTIDA profitable.  And, Hexo Corp. is also blowing through its cash on hand in just EBITDA alone.  Basically, if Hexo Corp. were to be EBITDA profitable and burning through cash because of continuing costs outside of the core business, one could determine that all any of these cannabis stocks would have to do is simply scale up.  So, if scaling up could bring in far more revenue, then profits would be able to shave down losses.

This is not necessarily the case with Hexo Corp., and the likely culprit in HEXO stock declining as it is.

Hexo Debt Servicing

As it turns out, Hexo Corp. may have a tough time servicing its debt, as pointed out by an analyst who downgraded HEXO stock.  The fear there is some $360M in debt servicing despite achieving EBITDA profitability because of the Redecan acquisition.  So, the burn rate, while it could float the Hexo Corp.’s daily operations, you have to also factor in debt servicing.

Hexo Total Equity

If Hexo Corp. were to need access to additional capital to work through until it could achieve EBITDA profitability and then you would look at total equity to see what could be leveraged.  Hexo Corp has plenty of equity.  In fact, they have more than 10x the current burn rate.  This would likely keep Hexo Corp. in cash for about 3 years’ time if they needed to borrow during that time.

However, access to cash is one thing.  Turning that cash into an investment that turns a profit appears to be the real crux for Hexo Corp.  Cannabis stocks have been around in Canada for some 3 years now.  And, yet, Hexo Corp has not been able to really achieve the first real major milestone of EBITDA profitability.

So, when I look at total assets at this point, despite there beings some there, I just do not see it as a rationale to really go in on Hexo Corp. and buy HEXO stock.  They are going to continue burning cash.

But, what if Tilray acquired all of HEXO stock?

Hexo Debt Servicing

As I highlighted above, cash on hand will get Hexo only so far.  Then, they will need to raise more cash.  But, and as pointed out already, Hexo may have problems with its future debt service.  However, the Redecan deal may alleviate that issue.  We will know more in the future after we start seeing more data from Redecan incorporated into HEXO Stock financial data.

Hexo Corp. HEXO Stock Forecast

Hexo Corp HEXO Stock DCF

I try and stay as consistent as I can with the input variables when I put together my DCFs.  While Hexo Corp has upside potential, there is work to go.  Still, with what they are putting together, this could really push Hexo forward.  But, and, again, there is a lot more work to go.

Still, the numbers I am putting together comes up to $2.80 for intrinsic value.  But, if Hexo were to clean up its balance sheet, do something about the cash burn, improve gross margins and operating margins, EBITDA profitability and increases from there may drive HEXO stock higher along with my intrinsic value.  I’m not going to hold my breath.  Likely, Tilray will own Hexo before profitability occurs.  So, Tilray may be stealing future potential.  This, again, is one of the reasons I like Tilray.

Is Hexo Corp. HEXO Stock A Good Investment?

Tilray has made a few moves toward what looks to be eventually acquiring Hexo Corp.  This would get Tilray into Quebec and it would also get Tilray Redecan which may be the saving grace of Hexo Corp.

So, is that enough to front-run an acquisition and potentially pick up Tilray stock via Hexo stock at a discount?  Hmmm… This is a tough call.

If you are already invested in Hexo, you would likely do fine to hold on to HEXO stock simply because, with cannabis federal legalization, HEXO stock will go up.  And, if you factor in an acquisition by Tilray, this would also very likely push HEXO stock upward.

I can see the Tilray acquisition being positive for TLRY stock overall.  They would have a massive presence throughout Canada and are ultimately going to become a world player.  I cannot say the same for any of the US MSOs simply because they have not made any significant inroads to international plays.

Given that, getting into HEXO stock now means getting into Tilray with a likely premium addition.  And, from a long-term perspective, this will play out well.

But, on its own, Hexo has problems.  Redecan, and then eventually Tilray, may solve those issues.

Company Financial Data

InterCure INCR Stock Financial Data