More Downgrades for HEXO before Its Q4 Earnings

Hexo Corp. (HEXO) stock is currently down 26.24% on the NYSE on a year-to-date basis. Notably, this cannabis company has lost 33.94% of its value since October 1. The stock is 69.44% below its 52-week high price of $8.28 as of April 29, 2019.

On the TSE (Toronto Stock Exchange), Hexo Corp. is down by 35.7% to 3.35 Canadian dollars in 2019 YTD. Since October 1, the stock is down by 33.92% on the TSE.

Hexo’s recent share price crash

Hexo stock crashed after reporting its preliminary fourth-quarter of fiscal 2019 revenue results on October 10. Hexo guided for fourth-quarter net revenues of $14.5 million–$16.5 million and fiscal 2019 revenues of $46.5 million–$48.5 million. The company’s recent fourth-quarter revenue estimate is significantly lower than the company’s guidance in its Q3 earnings press release.

The company had guided for a sequential doubling of net revenue in the fourth quarter. Hexo Corp. reported net revenues of $12.96 million in the third quarter. So, the company was expecting close to $26 million in net revenues for the fourth quarter.

This news is proving to be a big blow to Hexo Corp.’s investors. The company had previously missed its consensus revenue and earnings estimates in its Q3 earnings reported on June 12. At that time, Hexo’s revenues were short of the consensus estimate of $14.0 million. Operating expenses also pushed up the company’s net losses year-over-year by 293.4% to $7.75 million in the third quarter.

To add to its woes, Hexo Corp, also withdrew its fiscal 2020 outlook on October 10. This implies that the company no longer expects net revenue of $400 million as forecast in its third-quarter earnings release. Instead, the company has cited regulatory delays, the slower retail rollout in Canada, and pricing pressures as the factors pushing down its revenue performance.

Now, we need to see how analysts are responding to these recent developments relating to Hexo Corp.

More Downgrades for HEXO before Its Q4 Earnings

Tracking the trend

On October 14, three analysts are covering Hexo Corp. stock on the NYSE with a consensus recommendation of the closing price. These analysts set a consensus target price of $4.63, implying an upside potential of 83.0% based on the last closing price. The company’s coverage has increased by one analyst since September. However, analysts have slashed the target price from $9.00 to reflect the changed factors.

Sixteen analysts are covering Hexo stock on the TSE on October 14, with a consensus recommendation of “buy.” The analysts have set the target price at 6.31 Canadian dollars. This implies an upside potential of 88.36% compared to the last closing price. In September, 15 analysts were covering Hexo stock, estimating a consensus target price of 10.37 Canadian dollars.

Which analysts have downgraded Hexo?

We anticipate a slew of analyst downgrades for Hexo Corp. ahead of its earnings. On October 11, Roth Capital analyst Scott Fortune downgraded Hexo’s rating from “buy” to “neutral.” The analyst also lowered the company’s target price from $10.00 to $3.00.

According to Fortune, Hexo Corp. has appropriately judged the political and regulatory environment in Canada and its impact on the legal cannabis industry. The analyst also agreed to the company’s claim of the much slower rollout of retail cannabis stores in Canada.

On October 11, GMP analyst Robert Fagan also downgraded Hexo Corp. from “buy” to “hold.” The analyst also reduced the target price from 9.50 Canadian dollars to 4.00 Canadian dollars (about $3.00). Fagan raised concerns about the company’s product mix and the need to revamp its sales strategy in a timely manner.

On October 11, Eight Capital also downgraded Hexo Corp. from “buy” to “neutral.” The research firm reduced the target price from $12 to $3. Oppenheimer analyst Rupesh Parikh rated the company as “perform” with a target price of $2.75. However, the analyst recommends that investors stay on the sidelines despite the massive decline in Hexo’s share prices.

BofA downgraded Hexo

Even before Hexo Corp. released its disappointing announcement, BofA/Merrill analyst Christopher Carey downgraded the stock on October 7. The analyst rated the company as “underperform” and set a target price to 4 Canadian dollars. Then, BofA had attributed this downgrade to the abrupt resignation of CFO Michael Monahan.

On October 11, Jefferies presented a different opinion on Hexo Corp.’s current revenue update. Jefferies analyst Owen Bennett raised the company’s rating from “underperform” to “hold” and set its target price at $2.90. The analyst believes that investors are in a better position to gauge the company’s risk profile.

How has the cannabis industry responded?

After Hexo Corp.’s preliminary fourth-quarter earnings announcement, GLJ Research’s Gordon Johnson expressed concern about all cannabis stocks. The analyst expects the earnings season to be “draconian.” He attributed the bearish outlook to the overvaluation of these stocks, as well as expectations about weak revenue and earnings performance.

Johnson told The Fly about the possibility of cannabis companies having to buy back products they previously sold. The analyst cited an example of Canopy Growth (CGC), noting, “Looking at the last quarter, Canopy Growth was forced to buy back product it had previously sold. If you look at the bylaws of Canadian Providences, they can effectively force Canadian producers to buy back product if they deem that necessary. […] Canopy reported this as an $8M write-down, but you can’t understate how important this is… they were forced to buy product they previously sold.”

Johnson also highlighted his negative opinion for Tilray (TLRY). The analyst expects a 71% decline in Tilray’s stock price by the end of fiscal 2020. Tilray stock is already down 70.29% in 2019 year-to-date.

Stifel analyst W. Andrew Carter also highlighted the negative impact of Hexo’s headline on the overall cannabis sector. The analyst expects companies to find it difficult to raise capital in this difficult environment. However, Carter expects Canopy Growth and Cronos Group (CRON) to be better positioned in this tough environment. Year-to-date, CGC stock is down 27.69%, and CRON stock is down 24.49%.

On the other hand, Fortune hinted at somewhat positive future prospects for the cannabis sector. The analyst admitted to concerns associated with capital access in the industry. However, he still expects the cannabis industry to grow at CAGR (compound average growth rate) of 27% in the next three years.