21 Oct

HEXO: What Can You Expect from Its Q4 Earnings?

WRITTEN BY Rajiv Nanjapla

HEXO (HEXO) is scheduled to report its fourth-quarter earnings for fiscal 2019 before the market opens on October 24. So far, October has been tough for the company, with its stock falling 31.2% as of October 18.

The abrupt resignation of its CFO, the withdrawal of its previously announced fiscal 2020 guidance, and analysts’ downgrade appear to have led the company’s stock to fall. The weakness in the cannabis sector due to the recent vaping-related deaths has also dragged HEXO’s stock down.

HEXO: What Can You Expect from Its Q4 Earnings?

Analysts’ estimates

On October 10, HEXO’s management announced its preliminary revenue for its fourth quarter, which ended on July 31. The company’s management expects its fourth-quarter revenue to be 14.5 million–16.5 million Canadian dollars.

With respect to its fourth-quarter preliminary revenue, the company’s management stated that its revenues were lower than expected due to weak product sales. The administration blamed slower opening of new stores, delay in government’s approvals for the sale of cannabis-derived products, and pricing pressure for weaker sales.

For the quarter, analysts expect HEXO to report revenue of 16.1 million Canadian dollars. Sequentially, analysts’ revenue estimates represent an increase of 23.3% from 13 million Canadian dollars in the third quarter.

In May 2019, HEXO completed the acquisition of Newstrike Brands. This acquisition increased HEXO’s annual production to 150,000 kilograms per year when the facilities become fully operational. Also, the acquisition has expanded the company’s market penetration to eight provinces in Canada.

For the quarter ended June 30, HEXO’s peers Aurora Cannabis (ACB), Canopy Growth (WEED) (CGC), and Cronos Group (CRON) reported sequential revenue growth of 51.9%, -3.8%, and 58.2%, respectively.

HEXO’s net loss to increase

Analysts expect HEXO’s net losses to increase from 7.75 Canadian dollars in the third quarter to 13.78 Canadian dollars. For the quarter, they are projecting gross margin to fall. Its the SG&A (selling, general, and administrative) expenses are expected to rise. Analysts expect the company to report adjusted EBITDA of -10.7 million Canadian dollars compared to -1.9 million Canadian dollars in the third quarter.

In comparison, Aurora Cannabis, Canopy Growth, and Cronos Group also posted adjusted EBITDA of -11.7 million Canadian dollars, -92 million Canadian dollars, and -17.8 million Canadian dollars, respectively, for the quarter ended on June 30.

Analysts’ ratings on Hexo stock

This month, Bank of America Merrill Lynch, Roth Capital, GMP, and Eight Capital have all downgraded HEXO stock. On October 7, Bank of America analyst Christopher Carey downgraded the stock from “buy” to “underperform.” He also lowered its price target from $9 to $4. For more, please read Hexo: Why Did BofA Double Downgrade the Stock?

Roth Capital, GMP, and Eight Capital all downgraded the stock from “buy” to “neutral.” You can read more on this topic in More Downgrades for HEXO before Its Q4 Earnings.

On October 18, 16 analysts covered HEXO. Despite the recent downgrades, 50% of them still favor a “buy” rating for the stock. Plus, 43.8% are in favor of a “hold” rating, and 6.3% recommend a “sell” rating. Overall, analysts have a 12-month price target of 6.05 Canadian dollars, which implies a return potential of 68% from its October 18 closing price.

Let’s look at analysts’ recommendations for Hexo’s peers:

  • For Aurora, 47.1% of the 17 analysts favor a “buy” rating for the stock. The consensus price target stands at 8.60 Canadian dollars, with a 12-month return potential of 78.7%.
  • Of the 21 analysts that cover Canopy Growth, 52.4% have rated it has “buy.” Analysts gave the stock a 12-month price target of 46.27 Canadian dollars with a return potential of 74.1%.
  • Analysts favor the “hold “rating for Cronos Group. Of the 13 analysts covering the stock, 61.5% gave it a “hold” rating. Analysts gave Cronos a 12-month consensus price target of 16.24 Canadian dollars with a return potential of 48.6%.

Hexo’s YTD stock performance

The recent vaping-related deaths, the expectation of slower revenue growth during the second half of 2019, and regulatory scandals have led the cannabis sector to underperform. Year-to-date, the Horizons Marijuana Life Sciences Index ETF (HMMJ), and the ETFMG Alternative Harvest ETF (MJ) have fallen 26.1% and 21.4%, respectively. However, during the same period, the S&P 500 Index has increased 19.1%.

This year, HEXO has lost 23.6% of its stock value as of October 18. During the same period, its peers Aurora, Canopy, and Cronos have fallen 29.1%, 27.4%, and 24.0%, respectively.

For analysts’ ratings, and marijuana-related news and updates, please follow 420 Investor Daily.

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