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Should You Chase the Big Rally In Pyxus Stock?

Pyxus stock popped more than 25% after Q3 earnings, but this rally doesn't look sustainable

Shares of Pyxus (NYSE:PYX) roared higher on Feb. 12, after the global agricultural company reported third-quarter numbers that largely impressed investors and implied that new growth initiatives may finally be taking hold. As of this writing, Pyxus stock is up more than 25% on the day.

To be sure, Pyxus stock was roughly 70% off its 52-week highs heading into the Q3 print. As such, the natural question here is as follows: Is this big rally legit, or is it simply a dead cat bounce?

I’m inclined to say the latter.

Pyxus belongs in the basket of cannabis hype stocks that went parabolic in late 2018 during the cannabis craze. That bubble popped. PYX stock dropped. Ever since then, there has been a clear divergence in cannabis winners and losers. Some pot stocks have rallied back to all-time highs on continued positive developments. See Canopy (NYSE:CGC). Others haven’t, and Pyxus belongs in that group.

There’s a reason for that: The cannabis side of the Pyxus business is very small, and it’s pretty much the only part that has healthy long-term growth potential. Total revenues are struggling to head consistently higher, margins are under pressure and leverage is a problem.

In other words, there are a lot of red flags here. Third-quarter numbers didn’t fully address those red flags. So long as those red flags hang around, Pyxus stock will remain volatile and it will struggle to hold onto gains.

Third-Quarter Numbers Were Good Enough

My overall interpretation on PYX’s third-quarter earnings report was that it was good enough to showcase that this business isn’t completely worthless.

Heading into the print, Pyxus had a market cap of just $150 million. To put that in context, revenues this year are expected north of $1.8 billion, while adjusted EBITDA is expected at $155 million. Thus, heading into the Q3 earnings report, Pyxus stock was being valued at a market cap less than this year’s projected EBITDA.

Against that valuation backdrop, Pyxus’ numbers simply needed to be “not horrible” in order to warrant a pop in Pyxus stock.

They weren’t horrible. Revenues rose nearly 10% year-over-year, after dropping 12% in the previous quarter. Gross margins fell back, but not by as much last quarter. New growth initiatives showed promise, including double-digit revenue growth from the e-liquids category. The guide didn’t get decimated.

Overall, it was a decent quarter, and considering the anemic valuation heading into the print, decent was good enough to cause a 20% pop in PYX stock.

Red Flags Remain

This set up is tempting to buy into. You have a cannabis hype stock that lost all its hype, but it’s now starting to get some back. The valuation is ostensibly attractive. The long-term upside is potentially enormous through increased cannabis exposure. You also have massive short interest.

Overall, I can see why someone would want to but into this Pyxus stock rally. If cannabis fever strikes Pyxus investors again, this stock could easily keep running higher for a little while longer.

But, that rally won’t last. And, it won’t last because there are fundamental issues here. Namely, this company is only 3% cannabis and new growth initiatives. It’s 97% tobacco, and that 97% is facing secular headwinds. Meanwhile, margins are falling, and EBITDA margins are expected to be just 8% this year. Revenues have been on a downtrend for five years.

Above all else, there’s a mountain of debt on the balance sheet. Net debt in the third-quarter totaled just under $1.3 billion. EBITDA over the past twelve months is just over $150 million. Thus, Pyxus has a scary net debt to EBITDA ratio of over 8. That’s unsustainable, and implies tremendous risk.

Overall, the long-term challenges facing Pyxus were not fully addressed by decent third-quarter numbers. As such, this rally looks more like a dead cat bounce than the beginning of a big turnaround.

Bottom Line on PYX Stock

For risk-adverse investors, Pyxus is a cannabis hype stock that you should probably forget about. For investors looking for exposure to the cannabis sector, consider buying Canopy on a dip instead. And, for investors looking for a breakout stock, take a look at these stocks instead. Bottom line: Pyxus stock is a speculative long that isn’t worth the risk at current levels.

As of this writing, Luke Lango was long CGC.

Article printed from InvestorPlace Media,

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