Spring is approaching, but for the Canadian cannabis sector, the long winter faded months ago. Valuations across the segment have soared since Joe Biden was elected President and the Dems took hold of the Senate. Following which, the strong aroma of marijuana reform at the federal level is in the air.
And like many Canadian LPs, Hexo (HEXO) stock has benefited. Shares have overturned a 2-year slide and are up 80% year-to-date.
Observers, however, have claimed investors’ enthusiasm for Canadian names is possibly misguided. The local US producers – MSOs (multistate operators) – are the ones who really stand to benefit from favorable federal legislation, and it will be difficult for the Canadian players to gain a foothold in the lucrative US market. Only those with deep pockets and strong connections will stand to reap the rewards on offer.
BTIG’s John Zamparo thinks the noises emanating from Hexo HQ place it in a strong position to compete.
During Hexo’s recent earnings call, the company said it is in ”advanced discussions with CPG partners on royalty-style arrangements for edibles products.” That would give Hexo more exposure to the US cannabis sector, according to Zamparo.
“This may not significantly move the needle in Canada (edibles generate just 4% of industry sales, per Hifyre), but affiliation with established CPG brands and potential for U.S./international sales are both compelling benefits,” Zamparo said. “We acknowledge that potential partnerships have been discussed for years, but seem more likely to happen in 2021/2022, particularly due to potentially favourable U.S. legislation.”
Despite a deeper loss than anticipated in the quarter, there were several positives in Hexo’s latest financial results. Revenue increased by 94% year-over-year to reach C$32.8 million. Compounded quarterly growth over the last 5 quarters stands at 18%, second only to Cronos in the Canadian market.
Although beverages currently make up just 2% of industry sales, long-term category growth is “compelling,” says Zamparo, and Hexo now has a 44% share of the market – double than what it held in September.
Looking ahead, there’s the consummation of the Zenabis deal to look forward to in FQ4, which should add “another few percentage points of market share, and meaningful international sales should lift GM% above 40%.”
Accordingly, Zamparo rates HEXO shares an Outperform (i.e. Buy), along with a C$13 (US$10.33) price target. This figure implies a 56% upside potential from current levels. (To watch Zamparo’s track record, click here)
Turning now to the rest of the Street, most analysts beg to differ. HEXO’s Hold consensus rating breaks down into 6 Holds 3 Buys, and 1 Sell. Yet, the US$7.99 average price target brings the upside potential to 21%. It will be interesting to see whether the analysts upgrade their ratings or downgrade price targets over the coming months. (See Hexo stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
