Yesterday MKM Partners analyst Bill Kirk initiated coverage of Hexo Corp. (HEXO) with a “buy” rating, taking the most optimistic stance on this stock out of the 8 cannabis stocks that he began covering.
Kirk gives HEXO stock a C$12.00 price target and predicts a 130% gain in the next 12 months. While other analysts may not be giving HEXO the benefit of the doubt, Kirk seems confident that the company will hit its 2020 revenue target of C$400 million.
“We believe HEXO’s approach to be the working component of expert partners’ products has the best chance of creating a defensible brand (‘Powered by HEXO’),” Kirk wrote in a note to investors.
Part of the reason Kirk is bullish on HEXO is because compared to its cannabis peers, Hexo Corp. has a strong balance sheet of cash reserves ($129 million) and relatively little debt ($23 million) to offset it.
It’s all about the edibles
But perhaps more importantly, Kirk is found of HEXO’s business model and how the company is positioning itself in THC edibles market. Part of that positioning is their key partnership with Molson Coors, with which HEXO operates a joint venture.
While Molson Coors provides a vast distribution network for their products, HEXO offers the key ingredient for cannabis-infused beverages, cosmetics and food. HEXO has even trademarked its slogan “Powered by HEXO” to advertise the importance of their ingredients in their partners’ products.
The company’s strong branding positioning is important, notes Kirk, because it sets HEXO up so that the company’s product won’t become commoditized like so many other cannabis product categories have become.
In other words, HEXO isn’t succumbing to the race to the cheapest gram, which could quickly become a race to the bottom, pending oversupply concerns. It’s good that the company knows its place, because HEXO has less growing capacity than rivals “Canopy, Aurora, and Tilray,” said Kirk.
By focusing on the edible game, HEXO will face off against only one other major rival (Canopy Growth Corp), should Recreation 2.0 go through as planned this mid-December when Canada legalizes edibles.
With all of that being said, HEXO stock is still down more than half from its late-April highs from earlier this year (along with the rest of the cannabis sector). In the company’s Q3 earnings report, 84% of the company’s revenue came from flower.
While the company has made it clear that it’s moving away from flower to focus on the edibles market, it now puts the company in a situation of having most of its eggs in one basket – a gift basket that should hopefully be ready to open come mid-December.
Until then, investors will be looking for a show of strength in the company’s upcoming earnings report. Stay tuned for HEXO’s upcoming earnings release scheduled for September 26, 2019.
HEXO shares . Year-to-date, HEXO has gained 27.11%, versus a 20.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Eric Bowler
Eric is an accomplished journalist providing in-depth insights for more than two decades, with a special focus on the cannabis industry. Learn more about Eric’s background, along with links to his most recent articles. More...