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HEXO: Lower Target Price and Valuation Multiple

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As of August 13, HEXO (HEXO) was trading at 6.51 Canadian dollars—a fall of 30.9% since its third-quarter earnings on June 12. In the third quarter, HEXO reported a sequential fall in its revenues, while its net losses widened sequentially.

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Why did HEXO stock fall?

On July 18, HEXO announced that its co-founder, Adam Miron, was stepping down as its chief brand officer. However, he will still serve on the company’s board. There wasn’t a reason for investors to panic. However, CannTrust (CTST) received a non-compliance report from Health Canada for its greenhouse facility in Pelham, Ontario. Several media reports claimed that CannTrust CEO Peter Aceto and Chairman Eric Paul knew about the issues. Following the reports, the company fired Aceto. Meanwhile, the company asked Paul to resign. Aphria (APHA) was in the news for its investments in Latin America, which caused CEO Vic Neufeld to step down. So, investors are concerned about key executives leaving the companies. The speculations led to a fall in HEXO’s stock price.

HEXO’s valuation multiple

The decline of over 30% in HEXO’s stock price led to a fall in its valuation multiple. As of August 16, the company was trading at a forward EV-to-sales multiple of 4.17x compared to 6.27x before the announcement of its third-quarter earnings. Also, the company is trading at a discount compared to its average valuation multiple of 5.29x for the last seven months. Despite the fall, HEXO continues to trade at a higher valuation multiple than its peers’ median of 4.97x. On the same day, Aurora Cannabis (ACB), Aphria (APHA), and Tilray (TLRY) were trading at forward EV-to-sales multiples of 11.58x, 2.07x, and 9.07x, respectively.

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Analysts’ recommendations

Since HEXO’s third-quarter earnings, CIBC and Oppenheimer have downgraded the stock. On June 17, CIBC lowered its rating to “neutral” from “outperform.” The investment firm lowered its target price to 8.50 Canadian dollars from 9.50 Canadian dollars. On June 25, Oppenheimer downgraded the stock to “perform” from “outperform.”

Overall, analysts favor a “buy” rating for HEXO. Among the 15 analysts that follow the stock, 73.3% recommended a “buy,” 20% recommended a “hold,” and 6.7% recommended a “sell.” On average, analysts have a 12-month target price of 10.37 Canadian dollars. As of August 16, the company is trading at a discount of 76% from analysts’ target price.

Peers’ stock comparison

Despite HEXO losing more than 30% of its stock value since it reported its third-quarter earnings, it has returned 25.1% YTD (year-to-date). In comparison, Aurora Cannabis, Aphria, and Tilray have returned 16.7%, 5.1%, and -55.6% YTD, respectively.

On August 6, Aurora Cannabis’s management provided better-than-expected guidance for the fourth quarter of fiscal 2019. The strong outlook caused the stock to rise. In the latest earnings, Aphria outperformed analysts’ top-line and bottom-line expectations, which led to a rise in its stock price. Tilray stock continues to struggle. The company’s net losses continue to widen.

For more on Aurora Cannabis’s valuation, read Aurora Cannabis’s Target Price and Valuation.

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