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Why Wall Street Revised HEXO’s 2020 Estimates

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On December 30, Hexo’s (HEXO) share price fell 4.38% to $1.53 on the NYSE. The stock also fell 4.76% to 2.0 Canadian dollars on the TSE. Most cannabis stocks, including Hexo, haven’t benefitted from the Santa Claus rally in 2019.

Hexo stock is down 55.39% year-to-date on the NYSE and 61.61% on the TSE. The company’s shares fell 81.79% from its 52-week high of $8.40 on the NYSE, and the stock is just 3.38% above its 52-week low price of $1.48. Also, HEXO fell by 82.28% from its 52-week high of 11.29 Canadian dollars on the TSE. And on December 30, Hexo stock closed at a 52-week low of 2.0 Canadian dollars on the TSE.

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Hexo shares have nosedived since the company announced a registered direct share offering of raising $25 million on December 26. The company offered around 15 million shares at $1.67 per share. As BNN Bloomberg reported, investors were spooked because the offer price was a 14.79% discount to Hexo’s closing price of $1.96 on December 24. Since November 29, the stock has fallen 29.17% on the NYSE and 30.07% on the TSE.

How analysts are rating Hexo on the TSE

A total of 15 analysts are covering Hexo stock on the TSE as of December 31, 2019. The number of analysts covering the company first rose from 10 in December 2018 to 15 in July 2019. In October 2019, 16 analysts covered the company, but the number dropped to 15 in November 2019.

Analyst and investor sentiment for Hexo has taken a hit since November 2019. The majority of analysts rated the stock a “hold” in November and December 2019. Previously, most analysts had rated the stock a “buy” in December 2018, July 2019, and October 2019.

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In December 2019, three analysts are rating the company a “buy,” six a “hold,” five a “sell,” and one a “strong sell.” The overall analyst sentiment seems to have significantly deteriorated compared to November. In November, three analysts rated the company a “buy,” eight a “hold,” three a “sell,” and one a “strong sell.”

Wall Street has given the stock a target price of 2.79 Canadian dollars, implying upside potential of 39.50% compared to its last closing price. The target price first increased from 8.95 Canadian dollars in December 2018 to 10.37 in July 2019. It further increased to 10.40 in October. But then it tumbled to 4.02 dollars in November.

How analysts are rating the stock on the NYSE

A total of four analysts are covering Hexo on NYSE as of December 31, 2019. The number of analysts covering the company rose from two in July and October 2019 to three in November 2019.

All analysts covering the stock had rated it a “buy” in July 2019 and October 2019. Now, most analysts rate the company a “hold.”

In December 2019, one analyst is rating the stock as a “buy” while three rate it as a “hold.” In November, three analysts rated the company a “hold.”

Analysts have given the stock a target price of $2.75, implying upside potential of 79.74% compared to its last closing price. They also slashed the target price of $9.0 in July and October 2019 to $2.70 in November 2019.

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Hexo’s Quebec stronghold may no longer be the differentiating factor

As BNN Bloomberg also reported, Hexo’s stronghold in Quebec had been pivotal in controlling the downfall of its shares compared to other cannabis players. However, the province may no longer be a competitive advantage for the company.

Lately, Quebec has intensified its regulatory scrutiny of cannabis products. On November 20, as Mondaq reported, the Quebec government increased the minimum age for cannabis consumption to 21, effective January 1, 2020. This age limit is more stringent than in other provinces in Canada.

Quebec had also attempted to stop individuals from growing cannabis plants at home. And while the court ruled this restriction to be unconstitutional, the province has succeeded in enforcing strict regulations on the sale of cannabis-infused edibles. On November 21, as Marijuana Business Daily reported, Quebec banned the sale of vaping products as part of a cannabis 2.0 launch. The province took this step in the wake of the vaping crisis.

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As BNN Bloomberg also reported, Cantor Fitzgerald considers Hexo’s over-exposure to the Quebec market to be a major risk. The company earns almost 70% of its sales from this province. So it may not benefit significantly from the Cannabis 2.0 launch in Quebec. The province has banned many Cannabis 2.0 products.

How analysts’ revenue estimates have changed for Hexo stock

Analysts first increased Hexo’s fiscal 2020 revenue estimates from 234 Canadian dollars in December 2018 to 329 in July 2019. The fiscal 2020 revenue estimate slightly reduced to 328 million in October 2019. Analysts then slashed their revenue estimate to 114 million in November. They now expect Hexo’s fiscal 2020 revenues at 80 million.

In December 2019, analysts have also significantly reduced the company’s fiscal 2021 and fiscal 2022 revenue estimates. In December 2018, they had projected the company’s fiscal 2021 revenues to be 346 million Canadian dollars. This estimate increased to 505 million in July 2019 and to 517 million in October 2019. Analysts, however, reduced Hexo’s fiscal 2021 revenue estimate to 235 million in November. In December, they’ve projected the company’s fiscal 2021 revenues at 169 million.

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Wall Street now expects Hexo’s fiscal 2022 revenues at 230 million Canadian dollars. And analysts have almost halved their revenue estimate from 401 million in December 2018. In the interim, they had raised Hexo’s fiscal 2022 revenue estimate to 716 million in July and October. However, they slashed this revenue estimate to 238 million in November.

How analysts’ EBITDA estimates have changed for Hexo

In December 2018, analysts had expected Hexo to become EBITDA-positive in fiscal 2020. They had estimated adjusted the company’s fiscal 2020 EBITDA at 82 million Canadian dollars in December 2018. Wall Street first reduced its EBITDA estimate to 57 million in July 2019 and 46 million in October 2019. The overall analyst sentiment for the company took a turn for the worst in November. Analysts projected Hexo’s fiscal 2020 EBITDA at -39 million Canadian dollars. They now expect even worse EBITDA of -56 million in fiscal 2020.

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In December 2018, analysts had also estimated Hexo’s fiscal 2021 adjusted EBITDA at 113 million Canadian dollars. They first increased this estimate to 116 million Canadian dollars in July 2019. But they then reduced it to 107 million in October. Analysts also slashed their fiscal 2021 adjusted EBITDA estimate to 13 million in November 2019. And in December 2019, analysts expect Hexo to break even with its EBITDA level in fiscal 2021.

Analysts also expect Hexo to become EBITDA-positive in fiscal 2022. They have, however, dramatically reduced their fiscal 2022 adjusted EBITDA estimate since December 2018. Previously, they had estimated Hexo’s fiscal 2022 EBITDA at 79 million Canadian dollars in December 2018. Analyst revised this estimate upwards to 178 million in July 2019 and then to 209 million in October. Wall Street, however, slashed its fiscal 2022 EBITDA estimate to 41 million in November and then to 36 million in December.

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