On February 21, Pot Stock News reported that Owen Bennett of Jefferies downgraded HEXO (TSE:HEXO) from a “hold” rating to “underperform.” He also cut its target price from 1.90 Canadian dollars to 1.0 Candian dollars. The new target price represents a fall of 29.1% from the company’s closing price of 1.41 Canadian dollars on February 21. Last month, Jefferies lowered its target price from 3.80 Canadian dollars to 1.90 Canadian dollars.
Bennett thinks that analysts’ consensus cannabis sales estimates for the Canadian market are too optimistic. Also, he said that introducing Cannabis 2.0 products might not significantly improve cannabis companies’ gross margins initially.
He stated that HEXO invested heavily in Cannabis 2.0 products. The company has 38 patents. HEXO plans to launch a variety of cannabis-infused beverages in association with Molson Coors in the first half of 2020. However, Bennett is skeptical about whether Cannabis 2.0 products will drive HEXO’s revenue significantly. He thinks that the company could benefit from selling its emulsion technology or other platform technologies to consumer companies. Bennett thinks that HEXO could also benefit from partnering with consumer companies to develop cannabis-derived products.
Other analysts’ recommendations for HEXO
Overall, analysts favor a “sell” recommendation for HEXO. Among the 15 analysts, seven recommend a “sell,” two recommend a “buy,” and six recommend a “hold.” Overall, analysts have a target price of 2.35 Canadian dollars, which implies a return potential of 27.0%. Last month, MKM Partners downgraded HEXO to “neutral” from “buy” due to the concerns about the lawsuit filed by MediPharm against HEXO.
In the above graph, you can see that analysts’ consensus target price has seen downward momentum since September 2019. The target price has fallen by 77.6% since September. The company’s weak first-quarter performance in December, concerns about dilution with new stock offerings, and MediPharm’s lawsuit might have prompted analysts’ to lower their target price.
Let’s look at analysts’ recommendations for HEXO’s peers:
- For Aphria (NYSE:APHA), 11 of the 15 analysts that follow the company have given a “buy” rating. As of February 21, analysts’ consensus target price is 11.71 Canadian dollars with a 12-month return potential of 114.4%.
- Analysts favor the “hold” rating for Cronos Group (NASDAQ:CRON). Seven of the 12 analysts recommend a “hold.” Overall, analysts’ average target price is 12.00 Canadian dollars, which implies a 12-month return potential of 27.1%.
- For Aurora Cannabis (NYSE:ACB), which reported its second-quarter earnings on February 13, analysts favor a “hold” rating. Among the 19 analysts, 13 recommend a “hold.” Overall, analysts have an average target price of 2.94 with a 12-month return potential of 32.9%.
Analysts’ estimates for HEXO
For fiscal 2020, analysts expect HEXO to report revenue of 80.5 million Canadian dollars. The estimate represents a rise of 69.3% from 47.5 million in fiscal 2019. They also expect the company to report a negative EBITDA of 57.2 million in fiscal 2020. The estimate is an improvement from a negative EBITDA of 64.1 million Canadian dollars in fiscal 2019. Notably, analysts expect the company’s EBITDA to turn positive in the second quarter of fiscal 2021.
On February 21, after the downgrade from Jefferies, HEXO stock fell to a low of 1.40 Canadian dollars before closing at 1.41 Canadian dollars. The stock fell 2.1% from the previous day’s closing price. So far in 2020, HEXO has lost 11.3% of its stock value as of February 21. The company’s stock price fell due to MediPharm’s lawsuit, the new equity offering, and weakness in the cannabis sector. During the same period, Aphria, Cronos Group, and Aurora Cannabis have fallen by 19.5%, 5.3%, and 20.8%, respectively.