HEXO Corp Is A Growing Concern For Your Portfolio

Weak Results Belie HEXO Corp’s Fundamental Strength 

HEXO Corp NYSE: HEXO has been one of our favorite Canadian cannabis companies for quite some time. The company started as one of Canada's smaller yet better run vertically integrated producers but is about to edge out its larger competitors and claim the number two spot if not number one.  While the big boys are still recovering from the early excesses of the industry, HEXO’s management, balance sheet, and capital position have allowed it to focus on a growth strategy that will soon drive revenues and earnings exponentially higher. Most notably, over the past quarter, the company entered into two deals to buy 48North Cannabis Corp and Redecan, purchases that put the company on track to quickly claim Canada's top spot in volume production of cannabis.

HEXO Corp: A Good Quarter That Could Have Been Better 

HEXO Corp had a decent third quarter and one that produced growth if not quite the amount of growth expected by the analyst. The company's revenue fell on a sequential basis but topped $22.70  million Canadian for 2.3% YoY growth. The analysts had been expecting closer to $34.6 million or about 3500 basis points more due to the company's acquisitions, market share gains, and production ramp over the past year. The mitigating factors are that an internal decision to improve product quality and certification issues in Israel cut into sales.

In regards to internal decision-making, the company saw a decline in adult-use non-beverage sales outside of Quebec due to strain cultivation decisions and production issues relating to hash and hash oil. Looking forward, cultivation levels are already bouncing back and the issue with hash production has been resolved. More importantly, the company reports sales of adult-use cannabis outside of Quebec increased by 170% from the same period last year and the strain/production decisions should help spur growth as well. Within Ontario, the company's home province, net revenue X-beverages increased by 14% on a sequential basis.

Looking at the adult-use beverage category, HEXO not only maintained its number one ranking in Canada but strengthened its position. Truss Beverage, a joint venture between Molson-Coors and HEXO, increased its market share to 46% nationally and will probably expand that over the summer. The company just unveiled six new products that include both CBD and THC infused beverages that it expects will drive growth. Infused beverages are as simple as tonic waters that are merely flavored with cannabis through more potent concoctions for the true believers.

The company did not give any guidance but the outlook is positive. Not only is the company investing in growth, but sales of cannabis are picking up with the relaxation of COVID restrictions and the reopening of the economy.  We believe this combination has the company set up for robust revenue growth over the next four quarters and a significant amount of earnings leverage as well.

The Technical Outlook: HEXO Corp Pulls Back Into Another Buy

Shares of HEXO Corp fell about 3% in pre-market trading following the release of the Q3 report providing a  buying opportunity for bullish investors. Discounting the Reddit-induced spike earlier this year, the stock is in a clear uptrend that is supported by internal improvements as well as acquisitional growth. Today's weakness is a knee-jerk reaction to the revenue miss that we think the market will quickly rectify. Price action may fall to the $6.50 level in the near term but we would expect to see support confirmed at this level. Longer-term, we see this stock continuing to trend upwards as the fundamentals improve and eventually retest the $10 level, perhaps later this year.