According to reports, the Covid 19 pandemic has taken a serious toll on mental health. Such conditions have played right into the hands of cannabis producers such as Hexo (NYSE:HEXO). Medical cannabis users for mental health purposes increased their usage by roughly 91% during the pandemic. This is perhaps why, despite the slowdown in economic activity, Hexo’s fourth-quarter revenues climbed 76% year-over-year. I feel Hexo stock is an attractive long-term investment with its Belleville facility’s potential, solid gross margins, and focus on internal process efficiency.
Hexo stock is up over 18% this month, riding the tailwinds from Joe Bidens US election victory and four new states legalizing marijuana. However, the election should do very little for a Canadian cannabis company such as Hexo. It could perhaps benefit the company if the US legalized marijuana on a federal level. Regardless of the increase, the stock is trading cheaply at roughly 72 cents, presenting a great buying opportunity.
Encouraging Fourth Quarter Results
Judging purely from a profitability standpoint, Hexo couldn’t have had a worse fourth quarter. Net loss widened by 279% compared to the same period last year. However, when you dig a little deeper, you see that it’s primarily attributable to a massive impairment loss. Impairment losses tend to come down hard on profits and ensure that its inventory valuation is more realistic. Impairment formed approximately 71.5% of the operating expenses. If you add back the impairment charge amounting to roughly $200 million, you’re left with a much lower loss.
On the flipside, consolidated revenue was up 76% from the same quarter last year to $27.1 million. Revenues were impressive, considering the slowdown in economic activity due to Covid 19. A significant positive for the company is its net revenue per gram, which rose from $2.95 to $2.22. Additionally, its adjusted EBITDA of -$3.25 million should break-even by the first half of 2021. Moreover, gross margins remained strong at 42%, excluding revenues from adult-use beverages.
Sebastien St-Louis, CEO and co-founder of Hexo, states that “Hexo’s topline growth this quarter reflects the ongoing performance and success of our 2.0 products and the high quality of our offering which repeatedly resonates with consumers.”
Through public and at-the-market offerings, net cash and cash equivalents increased by 95% from the previous quarter. The company’s working capital now stands at $223 million, including $184 million in cash alone.
The Potential of Truss and Hexo’s Renewed Focus
Hexo raised eyebrows back in 2018 when it partnered with Molson Coors (NYSE:TAP) to create a cannabis-infused beverage line called Truss. In 2020, we finally see the results from that deal. The fourth quarter of 2020 was its first quarter of selling adult-use beverages. Additionally, the company announced five brands under the Truss product line, offering several new options to its customers.
As per the management, Truss beat all its competitors in Canada, selling more beverages than all of them. Aphria (NASDAQ:APHA), another major player in the Canadian cannabis market, purchased Atlantan beermaker, SweetWater for $300 million. Hence, the competition is waking up to the massive potential of cannabis-infused beverages. However, Truss will always have the first movers’ advantage, and its partnership with Molson Coors provides it with a market reach across the country.
Moreover, the company’s management recently stated its goal of improving its internal processes. While its competitors look to grow through mergers and acquisitions, Hexo is looking to optimize its supply chain. The company has had a bad experience with one of its acquisitions, Newstrike Brands. Within one year of the purchase, It was reported that the company’s Newstrike’s facility was growing cannabis without a license. A company called MediPharm has also filed a lawsuit against Newstrike for unpaid bills. Hence, Hexo is now focusing specifically on improving its internal processes.
Final Word on Hexo Stock
Hexo has its risks, but if you’re a long-term investor, you’re likely to reap the rewards with your investment in the company. Its cannabis beverage line Truss is finally proving its naysayers wrong and is expected to be a major catalyst for future success. Additionally, the company is focusing on optimizing its internal processes and increase productivity. Revenues and margins remain strong, and the company should break-even by early 2021. Therefore, it’s best to go long with Hexo stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article