Hexo Corporation Is A Growing Concern
Hexo Corporation (NASDAQ:HEXO) is not Canada’s largest cannabis company by a long shot. With only about $100 milion (Canadian) in expected 2021 sales it is not even in the top five. But it is one of the more-interesting stories because of the company’s position. Hexo Corporation is headquartered in Quebec where the bulk of its business lay and the leading producer in terms of marketshare.
Quebec, as it turns out, is Canada’s 2nd-largest province by population size and has had the slowest roll-out of legalized cannabis. The province has less than 50 operational dispensaries which puts it in last place on a stores-to-population basis. What this means to me is an opportunity for above-trend growth that has this company set up for real profits within the next four quarters.
Hexo Corporation Made Significant Margin Gains In FQ1
The Canadian cannabis market has been adjusting to the reality of the Canadian cannabis market for over a year now. Issues with oversupply, overcapacity, overinvestment, and cash-burn have all but disappeared. This has the entire market on track for profitability and Hexo Corporation is at the forefront. The company let us know it was doubling-down on plans in that regard, the war on COGS (cost of goods sold) as they call it, and the results are already in the numbers.
Hexo Corporation brought in C$29.47 million in revenue for the quarter demonstrating not only organic growth in the primary Quebec marketplace but expansion into Canada’s other markets. On a province-basis, sales in Alberta expanded to 18% of the consolidation net while Ontario grew to 15% and British Columbia to 6%. The revenue (net of excise taxes and duties) is up 103.2% over the last year and beat the consensus by 305 basis points.
Moving down the report, the company’s adjusted margins improved on a YOY basis to 39% marking the 6th straight quarter of improvement. The margin is adjusted for the adult beverage portion of the business because that segment is still early in the roll-out and ramping phase. Moving down to the bottom line, the adjusted EBITDA loss of $4.2 million is up 87% on a sequential basis due to the aforementioned war on COGS.
“We made extraordinary gains toward profitability this quarter, as we continue to optimize production, persist in our war on COGS, and focus on reducing our SG&A. This was the sixth sequential quarter of Adjusted EBITDA improvement, as we march towards being Adjusted EBITDA positive. We believe the strength of our balance sheet, along with our low depreciable capital base, have put us on a path where we are looking beyond positive Adjusted EBITDA and striving towards positive EPS,”
The balance sheet is in great shape. Hexo Corporation is sitting on $250 million in liquidity with nearly $150 million in cash. The debt levels are very modest as well, so there is little to worry about there. The company burned through about $6.1 million in cash over the past quarter which means operations can be sustained for several years without the need for additional capital-raises.
The Technical Outlook: Hexo Corporation Is In Reversal
The evidence that Canada’s cannabis market is in reversal can be seen in more charts than this one but this one will do. Using the weekly chart, it is clear that Hexo Corporation hit a bottom over the last year and support is now on the rise. Better, the rising support is in turn driven by YOY and sequential operating improvements that have the company on track for profits. The Q1 results have shares up more than 10% in the early pre-market action and I think this is only the beginning. The indicators are both showing bullish signals that amount to a strong buy assuming the stock moves up to a new high. A move to a new high would be very bullish and could easily lead to many hundreds of percentage points in gains over the next year.
If a company's CEO, COO, and CFO were all selling shares of their stock, would you want to know?
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