Investor optimism in Hexo (NYSE:HEXO) and HEXO stock is extremely high right now, mainly in anticipation of federal cannabis legalization in the United States. The Canadian company has plans to enter the U.S. market very soon.
Thanks to increased interest in the marijuana sector, HEXO stock is now up over 100% year-to-date (YTD) and shows signs of more growth ahead. With a large addressable market and major expansion plans on the horizon, this is one of the top plays in the sector right now.
So, here’s why 2021 is going to be a big year for this Canadian pot play.
HEXO Stock Rallies on Expansion Plans
Hexo is attractive for a number of reasons, but maybe foremost is its expansion plans.
Fueled by momentum from the Blue Wave, it is currently making moves to increase its footprint in the market. The company is already a high-growth player, with several different brands under its belt. It also operates processing and distribution facilities across Quebec and Ontario and even has an R&D test kitchen for new cannabis product innovation.
With that expansive presence in Canada, Hexo is now eyeing the U.S. market. This could add significantly to its customer base.
Recently, Hexo has also been partnering with Molson Coors (NYSE:TAP) through a joint venture (JV) — Truss Beverages — to create THC-infused drinks. Now, though, “Coors has been teasing the release of a CBD drink for the U.S. market, where it owns the majority of a separate JV with Hexo called Truss CBD USA.” That line of non-alcoholic CBD-infused drinks could be big for both companies.
With marketing efforts for the product already underway, this new JV will open up a line of distribution for Hexo in the United States. That entry into the U.S. market will be a major growth driver for HEXO stock for years to come.
But that’s not all. In addition to the U.S. expansion, Hexo is also looking to mark its territory in Europe. For example, the company recently received approval on its “Powered By Hexo” trademark from EU authorities. However, additional details on this European expansion have yet to emerge.
Lastly, the company recently announced its acquisition of cannabis firm Zenabis in an “all-stock deal” worth 235 million CAD. That will also help this pot play grow its position in the domestic market.
These recent acquisitions and partnerships hint at massive upside for Hexo in the near future. And this growth will be amplified if federal legalization happens in the States, too. So, if there was ever a great time to buy this stock, now would be it.
A Look At The Financials
On top of its expansion plans, this company’s financials also make it promising.
After an over 40% decline in shares last year, HEXO stock is in a far better position today. For example, in the first quarter of 2021, it posted its sixth sequential EBITDA improvement. Gross revenue also amounted to $41.3 million — the highest in the company’s history. Plus, net revenue was up 103% from the prior year.
In terms of liquidity, Hexo posted working capital of $250.3 million in Q1 and a cash balance of $149.8 million. Currently, total debt stands at $65.6 million according to Seeking Alpha, with operating costs down significantly from $50.7 million in Q4 to $20.8 million in Q1. Given that healthy debt to asset ratio, Hexo should be able to fund its expansion as long as it sustains current revenue levels.
Looking ahead, Hexo is well-poised to grow organically in the months to come. Its partnership with Molson Coors will provide access to international markets and add to its gross margins. Analysts predict the deal will add to net revenue in the next quarter, too. This will be amplified by the Zenabis acquisition, which will help increase regional sales.
The Bottom Line
Given its recent partnerships and stellar Q1 performance, HEXO stock has a lot going for it, fundamentally speaking. However, it’s worth noting that the Canadian market does have some growing pains. Those could become a drag on the stock’s value.
Nevertheless, this company’s potential entry into the U.S. and EU markets should help it sustain growth levels and stay on top of its game.
I think HEXO is a strong buy right now, given the recent bullish sentiments towards the cannabis market. But if you are a risk-adverse investor, I would recommend waiting for more clarity on this name’s upcoming expansion plans before taking the plunge.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for Investor Place since 2020.