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Wall Street’s Expectations after Hexo’s Q3 Earnings

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Hexo (TSE:HEXO) reported better-than-expected results for the third quarter of fiscal 2020 last week. The company repeatedly disappointed investors in 2019. As a result, there wasn’t much hope. However, the company beat analysts’ revenue estimates. The EBITDA losses also improved compared to the same period last year. The stock rose after the results and finally closed with a gain of 7.6% on June 12. Let’s take a look at how analysts view the stock after the results.

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AltaCop thinks Hexo could still underperform

According to CanTech Letter, AltaCorp Capital analyst David Kideckel thinks that Hexo could still underperform. The company’s third-quarter revenue was at 22.1 million Canadian dollars. The revenue beat the consensus estimate of 19.9 million Canadian dollars. Hexo reported an EBITDA loss again, but the losses improved compared to the same quarter last year. The EBITDA losses were at 4.3 million Canadian dollars, which was better than the consensus estimate of 7.7 million Canadian dollars.

Meanwhile, the revenue for the quarter was better than Kideckel’s estimate of 16 million Canadian dollars. The EBITDA losses also improved compared to his estimate of a 4.7 million Canadian dollar loss. The analyst thinks that despite the performance, Hexo could still face industry headwinds. According to Kideckel, Hexo lags its peers with Cannabis 2.0 products (edibles, vapes, concentrates, and beverages). Recently, Canopy Growth (NYSE:CGC)(TSE:WEED) and OrganiGram (NASDAQ:OGI) announced their next batch of derivate products. Hexo also has a limited retail infrastructure that’s mainly in Canada, which could restrict its growth.

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Kideckel said, “In addition, we believe that near-term headwinds affecting the Canadian cannabis industry, a lack of derivative products, and the COVID-19 global crisis continue to impose uncertainty to HEXO’s outlook. As such, we have chosen to remain on the sidelines until the overall market environment improves and HEXO’s management shows consistent execution.”

The analyst kept its “underperform” rating for Hexo. He also reduced the target price for the stock to $1 from $1.5, which is 1.9% lower than the last closing price. The stock closed higher by 7.6% at $1.02 on the NYSE, while the Horizons Marijuana Life Sciences ETF gained 1.9% on June 12.

What do analysts think about Hexo stock?

Besides AltaCorp, Eight Capital also cut the target price to 0.90 Canadian dollars from 1.15 Canadian dollars. Meanwhile, a few others increased the target price for the stock. Hexo’s optimistic outlook could drive profitability by the first half of 2021.

Alliance Global increased the target price to 2.5 Canadian dollars from 1.5 Canadian dollars. CIBC raised the target price to 1 Canadian dollar from 0.75 Canadian dollars. MKM Partners also raised the target price to 1.1 Canadian dollars from 1 Canadian dollar. Stifel raised the target price to 1.1 Canadian dollars from 0.55 Canadian dollars.

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Most analysts are still bearish on the stock. Among the 14 analysts that cover the stock, two recommend a “buy,” five recommend a “hold,” four recommend a “sell,” and three recommend a “strong sell.” The average target price for the stock is 1.46 Canadian dollars, which depicts an upside potential of 7% from the last closing price. The stock closed 6.2% higher at 1.36 Canadian dollars on the Toronto Stock Exchange on June 12.

Analysts raise estimates

After the better-than-expected earnings, analysts revised the estimates for Hexo for fiscal 2020 and beyond. For the fourth quarter, analysts expect a 58% increase in the revenue to 24.37 million Canadian dollars from 15.42 million Canadian dollars in the fourth quarter of fiscal 2019. Also, for fiscal 2020, analysts increased the estimate to 80 million Canadian dollars. The previous estimate before the earnings was 75 million Canadian dollars. For fiscal 2021, analysts increased the estimate to 142 million Canadian dollars from 139 million Canadian dollars before the earnings. Analysts also hope that the fiscal 2022 revenue will rise to 200 million Canadian dollars. The previous estimate before the earnings was 195 million Canadian dollars, respectively.

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Analysts also hope that the fourth-quarter EBITDA losses will be better at 5.5 million Canadian dollars compared to 35.1 million Canadian dollars in the fourth quarter of fiscal 2019. For fiscal 2020, the EBITDA losses could improve to 46 million Canadian dollars. The previous estimate before the earnings was 50 million Canadian dollars. For fiscal 2021, analysts don’t expect an EBITDA loss or profit compared to the previous estimate of a loss of 1 million Canadian dollars.

Analysts also hope that the company will report a positive EBITDA of 0.86 million Canadian dollars by the third quarter of fiscal 2021. For fiscal 2022, analysts expect the EBITDA profit to rise to 22 million Canadian dollars. The previous estimate before the earnings was 8 million Canadian dollars.

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What do I think?

Hexo’s performance this year will largely depend on Ontario and Quebec’s ability to open more legal stores. However, the COVID-19 crisis makes the situation challenging. Hexo has repeatedly missed its guidance and disappointed investors. As a result, the company might not recover yet. That said, the results help the company’s stock price, which is trading above $1. After receiving a NYSE listing notification, Hexo’s stock price needed a boost.

So far in June, Hexo has gained 47.8% as of June 14. Aurora Cannabis (NYSE:ACB) was also on the verge of delisting but recovered after a stock split. Although Aurora Cannabis surged 56.5% in May, it has fallen 6.3% so far in June. Canopy Growth and OrganiGram have gained 9.3% and 0.12% respectively, in June.

Stay with us to learn more about the cannabis sector.

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