The Bull Case for HEXO Stock Is Strong
As the stock market continues to beat down the Canadian cannabis stocks, investors need to find companies poised to benefit from Cannabis 2.0 with attractive stock valuations and valuable partnerships. HEXO (HEXO) fits the bill with their “Powered By HEXO” branding and big partnership with Molson Coors (TAP). The stock value just happens to be attractively priced.
Powered By HEXO
The initial wave of cannabis companies was focused near solely on total production capacity and medical cannabis. As recreational cannabis legalized and shifted consumption away from medical, the dried cannabis pricing has turned downward as consumers aren’t willing to pay the premium prices assigned to medical cannabis.
HEXO is focused on creating a brand for their products versus a focus on pure capacity growth. The company has capacity to produce 150,000 kg which is a substantial amount, but the leading Canadian players will quadruple those production levels.
In fact, MKM analyst Bill Kirk sees the brand building over pure capacity growth makes the stock worth C$12.00. HEXO jumped nearly 11% on the news, but the stock still trades at only $4.15 on the NYSE. Kirk's target is equivalent to a $9.00 target price for incredible upside of far over 100%.
The Cannabis 2.0 products open up mid-December. HEXO is one of the best positioned companies for this market opening up in Canada due to the beverages partnership with Molson Coors.
The other companies with big partnerships have market valuations in the multi-billion range showing the bargain that exists in this stock trading for a valuation of only $1.1 billion. The whole benefit of working with Molson Coors is the access to the distribution network in the U.S. HEXO has 30 chemist and PhDs working on research surrounding making cannabis beverages and other edibles with faster onset while removing the taste and odor of cannabis products.
Big Plans
CEO St. Louis recently completed an interview where he has plans for the company becoming a top 3 global brand with at least 10% market share. Some might question whether the company is even a top 3 player in Canada.
In order to reach this goal, HEXO has plans to spend up to $6 billion over the next decade on investing in cannabis products in Europe and the U.S. while having only spent about $500 million to date. In essence, the CEO is correctly planning to spend when the market develops in other parts of the world and will likely utilize the Canadian operations to fund a large part of that expansion.
The company has a long way to go with forecasts for FY20 revenues starting this month only reaching $300 million. The good news is that investors aren’t paying up for hefty expectations before the market really opens up with Canada still battling black market cannabis and edibles not legalized until mid-December.
Takeaway
The key investor takeaway is that HEXO is of the few cannabis companies that have steered away from growing farming operations in order to focus on the brand and partnerships that will fuel long-term growth. Both MKM Partners and the CEO see the company worth a lot more as the business model plays out over the next year due to the focus on beverages.
TipRanks’ data shows an overwhelmingly bullish camp backing this cannabis stock. Out of the 15 analysts polled in the past 12 months, 11 rate Hexo stock a Buy, 3 rate the stock a Hold, while only one recommends Sell. With a return potential of nearly 150%, the stock's consensus target price stands at $10.33.
Disclosure: No position.
