Headquartered in Kanata, Canada, consumer packaged goods cannabis company HEXO Corp. (HEXO - Get Rating) produces and distributes innovative products to serve the global cannabis market. Canada legalized cannabis in 2018, and Canada’s legal adult-use cannabis market is expected to reach CAD8.62 billion ($6.97 billion) by 2026. However, the industry continues to face several restrictions.

HEXO’s shares have declined 14.5% in price over the past month and 61.5% over the past three months to close yesterday’s trading session at $1.65, after hitting its all-time low of $1.60.

Scott Cooper was appointed as the company’s new President & CEO on October 20 after its former co-founded, CEO Sebastien St-Louis, left due to a ‘strategic reorganization.’ Also, HEXO has remained unprofitable in the third quarter, and its EPS is expected to remain negative in its fiscal fourth quarter (ended July 31, 2021). So, HEXO’s near-term prospects look bleak.

Click here to check out our Cannabis Industry Report for 2021

Here are the factors that could influence HEXO’s performance in the upcoming months:

Cash Outflow for Acquisitions

HEXO acquired 48North Cannabis Corp. on September 1. On August 30, it acquired Redecan, Canada’s largest privately-owned licensed producer, for $400 million in cash and 69.70 million newly issued common shares of HEXO. Also, on June 1, HEXO acquired Zenabis Global Inc. It has made several other acquisitions over the past years, without much success; Its persistent cash outflow for acquisitions could take a toll on its already weak financials.

Unimpressive Financials

For its fiscal third quarter, ended April 30, 2021, HEXO’s net revenue decreased 31.1% sequentially to CAD22.66 million ($18.33 million). The company’s revenue from non-beverage adult-use fell 29% sequentially, due primarily to a sequential sales decline in the province of Quebec and certain production decisions. Its net loss came in at CAD20.71 million ($16.76 million), up 6.1% year-over-year. And its loss per share was CAD0.17, versus CAD0.26 in the year-ago period.

Poor Profitability

In terms of trailing-12-month gross profit margin, HEXO’s 9.72% is 82.3% lower than the 54.88% industry average. The stock’s 0.17% trailing-12-month asset turnover ratio is 52.9% lower than the 0.35% industry average. Furthermore, its trailing-12-month EBIT and EBITDA margins are negative, compared to the2.14% and 5.70% respective industry averages.

POWR Ratings Reflect Bleak Prospects

HEXO has an overall rating of F, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. HEXO has a D grade for Momentum, which is in sync with its 14.5% loss over the past month and 74.9% decline over the past six months.

The stock has an F grade for Quality, which is consistent with its lower-than-industry profitability ratios. HEXO’s 2.15 beta helped it earn an F grade for Stability.

Moreover, the stock has an F grade for Sentiment because analysts expect HEXO’s EPS to remain negative this year and next year.

HEXO is ranked #196 out of 202 stocks in the Medical – Pharmaceuticals industry. In addition to the POWR Rating grades I have just highlighted, we’ve also rated HEXO for Growth and Value. Click here to get all HEXO’s ratings.

Click here to checkout our Healthcare Sector Report for 2021

Bottom Line

HEXO is a low-priced stock, but we think it could be wise to avoid the stock now, given the company’s weak financials. Moreover, analysts expect its EPS to remain negative in the coming quarters.

How Does HEXO (HEXO) Stack Up Against its Peers?

While HEXO has an overall F POWR Rating, one  might want to consider taking a look at its industry peers having an A (Strong Buy) rating, such as Johnson & Johnson (JNJ - Get Rating), Novartis AG (NVS - Get Rating), and GlaxoSmithKline plc (GSK - Get Rating).

Click here to check out our Cannabis Industry Report for 2021

HEXO shares fell $1.65 (-100.00%) in premarket trading Friday. Year-to-date, HEXO has declined -55.16%, versus a 23.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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