Hexo Corp. (NYSE:HEXO) might have a chance of a turnaround this year if the company is successful in its efforts to get profitable. In fact, based on the company’s latest earnings report, I am changing my mind about HEXO stock.
I had previously written a number of critical articles on the company. However, I still think it is too early to set a value on HEXO stock.
Once the company is closer to profitability, especially cash flow profits, I think it might be easier to value the stock.
Nice Earnings Release
For example, on Dec. 18, the company reported a nice increase in revenue and a dramatic reduction in losses for its quarter ending Oct. 31. The part that impressed me was the reduction in losses in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization).
In the prior quarter ending July 31, its adjusted EBITDA losses were 12% of net sales. This quarter, ending Oct. 31, the revenue rose 9% but its adjusted EBITDA losses lowered to just 1.42% of this higher net revenue.
In other words, the company is cutting costs and ramping revenue. This is hard for a cannabis company to do since it is a commodity product. However, I was impressed by one sentence that the company had in its report:
We made extraordinary gains toward profitability this quarter, as we continue to optimize production, persist in our war on COGS, and focus on reducing our SG&A.
This made me laugh. I have never heard anyone say they are persisting in a war on COGS (i.e., cost of goods sold). That tells me the company is really now focused on achieving profitability.
Management Has Changed Their Attitude
They seem to have gotten the message. They now seem to realize HEXO stock is not going to rise unless they can show they are on a path to profitability.
Moreover, instead of doing a 1 for 8 reverse split, as they sought approval for, they only did a 1 for 4. This means there were more shares left outstanding, and hence a lower price.
As I discussed in my previous article, the 1 for 8 reverse split would let short-sellers easily borrow the stock on NYSE since the price would be over $5. But now with the larger number of shares outstanding using the 1 for 4 split, HEXO trades below $5 after the reverse split. This effectively hinders the short-selling of HEXO stock.
Moreover, as one Seeking Alpha author wrote, maybe management now realizes that dilutive acquisitions that did not produce accretive profits should stop. Cornerstone Investments wrote an article on Hexo with this title: “Time To Quit The Addiction Called Dilution.”
What to Do With HEXO Stock
So far, analysts do not expect positive profits until the year ending July 2023. That is two and a half years from now.
This is the main reason I do not want to put a value on HEXO stock yet. However, that timeframe could shorten significantly based on how well its next several quarters turn out.
For example, if the company can start to achieve adjusted EBITDA profits next quarter, and soon after that, cash flow profitability, it might be possible to significantly revalue HEXO stock.
Often, it becomes clear ahead of time. Analysts in Canada can begin to estimate sales by watching store traffic. In fact, there are specific “channel check” research firms that provide this information.
I am just not yet comfortable with providing an estimate for this cannabis company’s value, at least not without further margin guidance from Hexo Corp.
Nevertheless, I can say that if the path to profitability continues, it is likely that HEXO Corp’s underlying value, and hence HECO stock, will move up.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
