Analyst On Hexo Earnings: 'We Had Expected Worse'

Hexo Corp HEXO shares traded lower by 2.9% on Monday after the company’s fiscal first-quarter earnings came up short of market expectations. However, one analyst said Monday he “expected worse.”

The Analyst

Cantor Fitzgerald analyst Pablo Zuanic reiterated his Underperform rating for Hexo and cut his price target from CA$2.40 ($1.83) to CA$2.20 ($1.67).

The Thesis

Despite the target cut, Zuanic said Hexo’s first-quarter revenue of CA$14.5 million ($11.05 million) was better than feared. However, Zuanic says negative free cash flow of CA$79 million ($60 million) remains a major problem.

But while Hexo cleared his low bar of expectations for the first quarter, Zuanic said Hexo faces a difficult outlook for 2020.

“Given the company’s overexposure to QB (where 2.0 most products are now allowed) and its delayed 2.0 launch in other provinces, we see increased risks,” he wrote in a note.

Cantor Fitzgerald is projecting fiscal 2020 revenue of CA$61 million ($46.3 million), well below consensus analyst estimates of CA$106 million ($80.6 million).

Zuanic says Hexo is in a difficult position to compete in the cannabis 2.0 market given most 2.0 products have been banned in its home territory of Quebec. At the same time, he says Hexo’s ability to compete in other provinces may be hindered by its delayed 2.0 product launches, putting it at a competitive disadvantage in Ontario and other regions.

Benzinga’s Take

Top- and bottom-line misses and accelerating losses are a familiar story for cannabis investors at this point. Hexo investors are hoping for a rebound in 2020, but the only thing that seems certain at this point is traders can expect more cannabis stock volatility in coming quarters.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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