Has it been a terrible month for Quebec cannabis producer Hexo (NYSE:HEXO) or what? Hexo stock is down 44% over the past month and now trades a long way from its 52-week high set in April of $8.40.
Motley Fool contributor Sean Williams highlighted a single sentence in Hexo’s Q4 2019 update from Oct. 10 that explains why the Hexo stock price is falling.
“Slower than expected store rollouts, a delay in government approval for cannabis derivative products and early signs of pricing pressure are being felt nationally,” Hexo’s press release stated.
The good news for Hexo shareholders is that these aren’t company-specific problems but rather issues affecting the entire Canadian cannabis industry.
Aphria (NYSE:APHA) shares soared October 15 after it announced a second straight quarterly profit. More importantly, it reaffirmed its fiscal 2020 projections of between C$650-$700 million in revenue.
Except for Aphria, the Canadian marketplace appears to be a bit of a mess.
On Oct. 17, derivative products such as edibles and cannabis-infused drinks are set to get the green light in Canada. In mid-December, products should start hitting retail shelves, although history suggests the bulk of the new products won’t be in stores until early in 2020.
After Hexo pulled its 2020 guidance for CAD$400 million in annual revenue (a figure that I argued was ridiculous back in August) the importance of its Truss Beverages partnership with Molson Coors (NYSE: TAP) to produce cannabis-infused drinks for the Canadian market becomes even more critical to a Hexo stock revival.
In fact, Hexo could use a lifeline.
Molson Coors Could Be a Floor for Hexo Stock
In my August piece about Hexo, I suggested that Hexo could generate CAD$350 million in revenue by 2024, a far cry from CAD$400 million by 2020, but a decent amount just the same. Of that annual revenue, about half would come from drinks.
I further argued that it’s possible that Molson Coors, should Truss do well in Canada, would invite Hexo to do the same in the U.S., where the upside potential is much greater.
Hexo’s VO of Strategic Development, Jay McMillan, said in June that it would have a vast supply of cannabis-infused drinks come mid-December. Given Molson’s name is attached to that statement, I’m inclined to believe it’s not just hyperbole.
At the end of the day, I’ve felt that Molson’s involvement acted as a bit of a floor for Hexo’s stock price. The events of the last few days suggest that’s probably not the case.
However, what could make the difference is Molson Coors buying a big chunk of Hexo.
The Bottom Line on Hexo Stock
I don’t know if it would happen, but given Hexo’s market cap had dropped by 44% in the last month to $667 million, buying control of Hexo wouldn’t take much more than a half a billion dollars (based on buying 55% of Hexo stock at $4 a share or 50% premium). That’s not a lot of money to gain control of the leading cannabis producer in Quebec, Canada’s second-largest province by population.
Like Constellation Brands (NYSE:STZ) and its 38% stake in Canopy Growth (NYSE:CGC), which can grow to 55%, Molson Coors could change its mind about owning a piece of its joint-venture partner — Molson Coors owns 57.5% of Truss; Hexo owns the rest, and that would most likely stop the bleeding.
Until then, Hexo shareholders are in for one heck of a volatile ride.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
