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Is HEXO Stock a Buy After Monday’s Earnings Report?

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Marijuana producer HEXO (TSX:HEXO)(NYSE:HEXO) saw its stock price open 10% higher on Monday after releasing fiscal first-quarter 2021 financial results. Shares, however, lost most of the gains to close just 1% during the trading session. Could this be the best time to buy HEXO stock and profit from an upside in 2021 when the turnaround story shows full results?

HEXO reported record revenues and expanding margins

HEXO reported record revenues and narrower quarterly losses, and the company is close to becoming operating earnings positive.

Gross revenue for the quarter ended on October 31 this year was a record $41.3 million, up 114% year over year and 14% higher sequentially. Net revenue at $29.4 million set a new record for the firm after a 103% increase from last year. The company has reported record revenue for four consecutive quarters now, and sales growth momentum remains strong across Canadian provinces.

The company is now the fourth-largest Canadian pot firm ranked by adult-use cannabis sales. It maintains market leadership in Quebec, where it is the province’s preferred supplier. Moreover, its cannabis-infused beverages joint venture with Molson Coors, Truss Beverage, already leads the national infused drinks segment after a 54% sequential growth in revenue during the quarter.

Actually, more positive news points were studded across the company’s recently filed financial statements. HEXO’s consolidated gross margin before fair-value adjustments at 35% was much better than the 30% reported for the July quarter. Most noteworthy, adjusted gross margins could have been 39% if we exclude the beverages project, which is still in its infancy.

Quarterly operating expenses declined sequentially from $50.7 million to just $20.8 million. The company’s painful turnaround strategy has paid off, as the loss from operations declined to just $2.6 million — down from $60.5 million in a previous quarter.

Time to buy HEXO stock?

HEXO has entered a new season of sustainable growth, improving profitability, and lower cash burn. The momentum seen thus far could propel the marijuana stock to a better valuation in the near future.

Gross margins could expand further, as the Truss Beverage project became gross earnings positive recently. International cannabis sales recently contributed expanded gross margins of 72% from 50% during the previous quarter. It’s only natural to expect better margins and a better set of results in the next installment.

Market analysts expect HEXO to grow its net revenue by over 11% sequentially in the next results and to post first positive cash from operations during the third and fourth quarter of fiscal 2021.

Further, the company could report its first-ever quarterly positive earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter ending January 31, 2021. Adjusted EBITDA total could continue on a positive trend after improving by 87% from a $3.3 million loss by July to a $0.4 million loss by October this year.

Production optimization and cost controls have helped the company reduce operating losses and operating cash outflows. Management is already targeting net profitability after making “extraordinary gains towards profitability this quarter…” The CEO was upbeat about the latest results as quoted in Monday’s earnings release.

Consider this before buying the cannabis stock

The Canadian cannabis market still has some concerning issues negatively affecting industry growth and profitability. Such issues may dampen investor enthusiasm in 2021.

To add more, analysts don’t expect HEXO to report any positive net earnings for fiscal 2021. I am skeptical as to whether the company will make do with its $250 million working capital balance going forward. Shareholder dilution could persist for a short while longer.

Investors should take note that the company made significant inventory write-downs during the past fiscal year. Such write-downs may possibly artificially inflate its margins due to lower costs of goods sold. This could set the market up for disappointment in later accounting periods.

One more nagging issue is the company’s frequent changing its CFOs — a critical executive position. It clouds the buy decision.

Foolish bottom line

The numbers are coming right at HEXO, and the market will take notice. The company is on course to halt cash burn and could start generating positive adjusted EBITDA and net earnings per share in the coming few quarters. That said, there a few cosmetic issues that could continue to drag share price growth momentum.

Here are 10 interesting stock investment ideas to consider for next year.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. and HEXO.

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