HEXO Grows Business, Widens Margins And Shares Move Higher

Underdog HEXO Corp Emerges As A Winner In Canadian Cannabis 

We've always had an attraction for Canadian cannabis company HEXO Corp (NYSE: HEXO) despite its small stature. It is a leading vertically-integrated brand but even so, its sales are a mere fraction of industry leaders like Aphria and Canopy Growth Corporation but that is about to change. Not only is the company growing by leaps and bounds within its own native province but its sales in other parts of Canada are accelerating and acquisitional growth is back on the table. The new estimates have this company on track to become a top-three producer this year and do it profitably. 

Hexo Is Working Hard At Profitability, And It Shows 

HEXO had a very good quarter despite COVID-related headwinds in many of its end-markets. The company's net consolidated revenue came in at $32.8 million or up 92.9% and beat the analyst's estimates by 56% or 5600 basis points. The revenue gains were driven by positive increases in all verticals with a noteworthy 72% increase in non-beverage Canadian adult-use sales. HEXO's sales are primarily in its home province of Quebec but inroads into other provinces are bearing fruit. Sales outside of Quebec increased by 500 basis points to 49% of sales in the quarter and are on track to become the bulk of sales very soon. 

Revenue strength was also driven by the relaunch of the UP Cannabis brand. Sales of UP Cannabis increased to $3.2 million and 8% of sales versus only 1.0% in the year-ago period. Moving down the report, the company continues to show a net loss but the adjusted margins continue to improve. The Q4 net loss of $20.8 million is down more than 90% YOY and helped to drive a small $400 profit on an adjusted basis. Regardless of the size of the profit, this is the 7th quarter of margin gains and the first quarter of adjusted profits which has the company on track to deliver real profitability on schedule.  

The HEXO News Update Is Driving Value Too 

HEXO made a number of important announcements over the quarter two really stand out. The first is that a class action lawsuit alleging criminal misconduct was completely thrown out of court. The plaintiffs claimed the company withheld material information but were unable to substantiate it. The other news item is the acquisition of Zenabis Global. Zenabis Global is a Vancouver-based vertically integrated operator and will not only increase HEXO's production and retail capacity but also greatly expand its reach. The deal is subject to several approvals but is expected to be accretive to revenue and earnings immediately. 

"We are especially excited about our recently announced agreement to acquire Zenabis. We believe this transaction will be accretive for our shareholders and will position HEXO for accelerated domestic and international growth. The acquisition would place HEXO solidly in the top three position among licensed producers for Canadian adult-use cannabis sales, based on the most recent interim quarterly financial statements,” said CEO Sebastian St-Louis. 

The Technical Outlook: HEXO Confirms The Uptrend 

HEXO shares have been on a wild ride the last few months but the trend is up. The Q2 news has price action moving higher in the early session and confirming the trend as well. The price action is trading at a new high and supported by indicators that suggest upward drift if not a strong upward movement will continue in the near-term. The risk is that traders who bought in during the Reddit Rally may provide resistance to higher prices. Some of those traders are showing losses in the range of 25% to 30% and that can be hard to bear. Longer-term, we expect to see shares of HEXO overcome any near-term resistance and move back into the $16 to $24 range.