9 Oct

Hexo: Why Did BofA Double Downgrade the Stock?

WRITTEN BY Sushree Mohanty

Hexo (HEXO) made analysts optimistic in September. Beacon Securities and MKM Partners had a positive outlook for the stock. However, this week, Hexo announced that CFO Michael Monahan resigned. Bank of America Merrill Lynch double downgraded the stock on Monday. As a result, the stock fell 6.4%

BofA double downgraded HEXO

On Monday, Hexo announced that CFO Michael Monahan resigned due to personal reasons. Monahan said, “Since joining HEXO Corp, it has become apparent that this job requires me to spend the majority of my time in Gatineau and in Ottawa. During this phase of rapid expansion, the Chief Financial Officer should be working very closely with all team members, in person. This isn’t possible for me at this time given my family’s needs and so I have decided to resign.” He joined the company in late May.

Monahan’s sudden resignation prompted BofA to double downgrade the stock. BofA analyst Christopher Carey downgraded Hexo to “underperform” from “buy.” He also reduced the target price to $4 from $9, which represents an upside potential of 8.1% from its current trading price.

The BofA analyst thinks that the CFO’s sudden departure generates a lot of questions in investors’ minds. What else could be going on in the company?

What do other analysts think about Hexo?

On October 4, CIBC cut its target price for Hexo to 7.5 Canadian dollars from 8.5 Canadian dollars, which represents an upside potential of 54.3% from the current trading price.

Additionally, the BofA analyst thinks that Hexo will reduce its revenue target for fiscal 2020 due to a slowdown in the Canadian cannabis market in the second half of 2019.

BMO analyst Tamy Chen supported the BofA analyst’s opinion. Chen thinks that Hexo will miss its revenue guidance for the fourth quarter. The cannabis industry’s third-quarter sales could fall 20% sequentially.

In the third-quarter earnings call, Hexo mentioned that it expects to generate revenues of $400 million in fiscal 2020. The company also said that it’s on track to double its revenues in the fourth quarter.

Soon after Hexo’s third-quarter earnings, co-founder Adam Miron stepped down as the chief brand officer. However, analysts were optimistic about Hexo stock in September. In a Cantech Letter, Beacon Securities analyst Russell Stanley mentioned that Hexo could benefit from more diversification.

Hexo also spoke about how it’s gearing up for Canada’s second wave of edible legalization in October. Meanwhile, Aurora Cannabis, Aphria (APHA), Canopy Growth (CGC) (WEED), and Cronos Group are ready for Cannabis 2.0.

Currently, the consensus target price for Hexo stock is set at 10.01 Canadian dollars—down from 10.46 Canadian dollars in September. The target price represents an upside potential of 106% from its current trading price.

Analysts’ ratings

Analysts’ ratings for Hexo have changed since our last discussion. However, the number of analysts covering the stock remained the same. Among the 16 analysts covering the stock, two recommend a “strong-buy” compared to three in September. Nine analysts recommend a “buy” rating on the stock, three recommend a “hold,” one recommends a “sell,” and one recommends a “strong sell.”

Meanwhile, Canopy Growth mainly has “buy” and “hold” ratings on its stock. The company has a target price of 51.7 Canadian dollars. Aphria mainly has “buy” ratings and a target price of 14.9 Canadian dollars. Cronos Group has a “hold” rating and a target price of 18.6 Canadian dollars.

Hexo and peers’ stock performance

Hexo has gained 3.1% year-to-date. The stock has fallen 43.7% since its inception. Notably, the stock fell 2.2% in September. In October, Hexo stock has fallen 7.0%.

Meanwhile, Canopy Growth, Aurora Cannabis, Aphria, and Cronos Group stocks have fallen 0.92%, 5.4%, 2.1%, and 5.5% in October. Constellation Brands’ (STZ) investment in Canopy Growth resulted in losses for the company in its current quarter. Read Canopy Growth: Good Investment for Constellation Brands? to learn more.

On the industry front, state legalization is in full swing. In the US, Maine could generate revenues from recreational marijuana. You can also check our Cannabis Investment Guides Strategies and Information page. For more analysts’ updates, visit our Word on the Street page.

For more cannabis-related news and updates, visit 420 Investor Daily.

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