Hexo (HEXO) might have posted some improving revenue numbers in its latest financial statement but the recent sales boost is most likely fading already, according to Jefferies analyst Owen Bennett.
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Hexo’s 23% quarter-over-quarter sales uptick was down to its pivot toward the discount segment with its Original Stash offering. The discount strategy was extended upon with the premium Hexo brand’s addition of a 30g option, followed by a move into Hash. Bennett argues this is the wrong approach.
“As we have raised before, while such a strategy can provide a short term boost, competing on price is not sustainable, or likely to create brand loyalty and long term value (unless your investment proposition is based around being a low cost producer which Hexo’s is not),” Bennett said. “The lack of defensiveness competing on price is already evident with clear market share pressure on flower in the quarter, and we would expect to see the same thing going forward on Hash.”
Add into the mix “another significant inventory write-down” and a positive near-term outlook is further sullied.
While Bennett argues Hexo has so far “done little with its own brands to inspire,” hope for a meaningful turnaround rests on the potential of US CBD support. The company’s recent beverage launch – its joint venture with Molson Coors called Truss Beverages – left the analyst “very impressed,” although the size of the opportunity in the Canadian market is questionable. In the US, however, things could pan out differently, where the partnership “could provide material upside.”
“if Hexo can leverage this Molson/Truss distribution support to launch its own CBD brands, then it could become meaningful for sales,” Bennett noted, before concluding, “Visibility on this right now is minimal however.”
As a result, Bennett sticks to an Underperform (i.e. Sell) rating, while the prospect of dwindling sales results in a price target slash; The figure drops from C$0.75 ($0.57) to C$ 0.65 ($0.49), and represents possible downside of 23%. (To watch Bennett’s track record, click here)
Bennett’s colleagues, however, have a more optimistic outlook. Based on 1 Buy and Sell, each, plus 3 Holds, the analyst consensus rates the stock a Hold. The projection is for 3% of upside, given the average price target clocks in at C$0.98 ($0.74). (See Hexo stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.