Analysts Cut Target Prices after HEXO’s Q2 Earnings

Hexo (TSE:HEXO) reported its second-quarter earnings on March 30. For the quarter, the company missed analysts’ revenue expectations marginally, while its EBITDA was better than analysts’ expectations. To learn more, read Hexo Stock Tanks after Reporting Its Q2 Earnings. Meanwhile, during the quarter, Hexo’s management recognized impairment losses of 138.3 million Canadian dollars for its property, plant, and equipment and intangible assets and 111.9 million Canadian dollars of goodwill. The recognition of impairment losses led to a fall in the company’s stock price. The company has lost 24.8% of its stock value since it reported its second-quarter earnings. Let’s look at analysts’ recommendations for Hexo.

Since Hexo reported its second-quarter earnings, Eight Capital, Canaccord Genuity, and CIBC have all lowered their target prices. Eight Capital has cut its target price from 2 Canadian dollars to 1.15 Canadian dollars. Canaccord Genuity lowered its target price from 2.50 Canadian dollars to 1.30 Canadian dollars. Meanwhile, CIBC cut its target price from 2 Canadian dollars to 0.75 Canadian dollars. Overall, analysts’ consensus target price has fallen by 38.3% from 2.35 Canadian dollars to 1.45 Canadian dollars. Analysts’ new target price represents a 12-month return potential of 26% from the closing price of 1.15 Canadian dollars on Tuesday.

From the above graph, you can see that analysts’ consensus target price has been falling since October 2019. Weakness in the cannabis sector, a withdrawal of the fiscal 2020 guidance from Hexo’s management, and the abrupt resignation of its CFO led analysts to lower their target prices and downgrade the stock.

There hasn’t been a change in analysts’ ratings since Hexo reported its second-quarter earnings. As of Tuesday, 17 analysts follow the company. The number of analysts increased by two compared to 15 analysts on February 29. On March 10, Stifel initiated coverage on Hexo with a “sell” rating. Overall, analysts favor a “sell” rating for the stock. Among the 17 analysts, nine recommend a “sell,” one recommends a “buy,” and seven recommend a “hold.”

On Monday, Jefferies reiterated its “sell” rating on Hexo and maintained its target price of $0.70. The target price represents a fall of 16.4% from its closing price on Tuesday on the NYSE. As reported by TipRanks, Owen Bennett of Jefferies wrote in his research that he’s more focused on Hexo’s cash position. The company disclosed that it needs to raise more cash despite raising 130 million Canadian dollars in the last quarter. However, he added that it would be difficult to raise capital amid the current environment.

After reporting its second-quarter earnings, Hexo’s management restated its guidance of attaining positive cash flow by the second half of 2021. However, the guidance is based on assumptions related to store counts, improved operations, and positives from its cost-saving initiatives.

Meanwhile, David M. Kideckel of AltaCorp Capital said that the prospects look cloudy for Hexo, as reported by Cantech Letter. He also said, “We believe that HEXO is facing a storm of negative conditions which add significant uncertainty to its outlook and may thwart the Company’s ability to execute its business strategy in the near-to-medium term.”

Kideckel retained the “underperform” rating and target price of 1.05 Canadian dollars for the stock. For fiscal 2020, he expects Hexo to report revenue of 63.2 million Canadian dollars with a negative EBITDA of 290 million Canadian dollars. For fiscal 2021, he expects the company to report revenue of 91.5 million Canadian dollars with an adjusted EBITDA of 5.8 million.

Since the beginning of this year, Hexo has lost 44.4% of its stock value. The company has underperformed Canopy Growth (TSE:WEED) and Aphria (NYSE:APHA). Canopy Growth and Aphria have lost 25.1% and 36.7% of their target price. During the same period, Aurora Cannabis (NYSE:ACB) has fallen by 54.8%. I think that the weakening cash position and rising debt could impact Hexo’s growth prospects. So, I think that investors should avoid Hexo and look at other players in the cannabis space like Canopy Growth and Innovative Industrial Properties (NYSE:IIPR).