Is HEXO Stock Still a Buy Today?

Something good is brewing at HEXO. Investors could still profit on the stock’s further upside this year.

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Up 90% so far this year, HEXO’s (TSX:HEXO)(NYSE:HEXO) stock price finally took off in 2021. Although shares in the cannabis firm rode on a general bullish sentiment on the marijuana industry mostly triggered by a change in admiration in the United States, the marijuana firm was already churning out positive news well before the surge in pot stocks in 2021. The streak of good news continued in the company’s latest earnings results released on Thursday last week.

HEXO reports strong quarterly financial results

HEXO reported quarterly revenue growth of 94% year-over-year for the fiscal second quarter of 2021 which ended on January 31, 2021. Quarterly net sales at $32.8 million were 12% higher sequentially. Adjusted gross margins remained intact, but non-operating items dragged the bottom line into a $20.8 million loss.

A re-launch of the UP premium cannabis brand, sustained growth in the beverages segment, and overall market share wins across Canada continue to power the company’s strong sales growth post a painful restructuring exercise.

The cannabis firm has pivoted well from its major reliance on Quebec sales to become a nationally competitive producer of cannabis. Adult-use revenue (excluding beverages) from outside Quebec has increased from being 27% of segment sales in fiscal 2020 to 49% during the first half of fiscal 2021. The company is gaining market share in other provinces while holding onto its home advantage.

Most noteworthy, the company has emerged to be a market leader in the cannabis-infused beverages market. Its Truss partnership with Molson Coors is making good progress. The partnerships strategy is working well. Results will be better if the same success is repeated in the United States post the launch of CBD drinks in Colorado.

One small issue though, the medical cannabis segment continues to weaken as volumes shrink while prices soften.

Company prints its first quarter of positive EBITDA

HEXO managed to reach its target for positive adjusted EBITDA during the second quarter of fiscal 2021. Quarterly adjusted EBITDA at $202 thousand may not seem like much today. However, the company achieved that number over seven consecutive quarters of sequential improvement in the operating earnings measure.

The positive adjusted EBITDA figure compares very well against an $8.5 million loss during the same period a year ago. Well-known giants are struggling to reach this noble goal, and Aurora Cannabis has been shifting targets forward for some time.

It’s commendable that the company achieved this goal through good sales growth and gross margin expansions. However, it’s also worth noting that the improvement was aided by “increased non-cash depreciation expensed through costs of sales due to the impact of produced inventory in periods with higher depreciation being sold.” Depreciation is much lower now. Therefore, sales growth momentum should be sustained, and margins may need to expand further so as to maintain the new positive EBITDA status.

That said, there’s one distinguishing factor that stands out on HEXO. The company didn’t qualify for the government’s COVID-19 relief programs like the Canada Emergence Wage Subsidy (CEWS). Several of its competitors received tens of millions of dollars, which have boosted their operational cash flows.

Such aid could have boosted operating earnings and cash flows during the pandemic. Investors may need to take out this “added advantage” on competitor earnings before judging HEXO’s performance during the past year.

Is the stock a good buy right now?

In an earlier discussion on December 23, last year, and after noting the several improvements happening in the refocused company’s re-engineered business, I concluded that “investors are noticing HEXO’s tangible progress made during the year 2020. The numbers look much better, and the outlook is encouraging. However, its stock price hasn’t responded much — yet.”

The company’s share price finally surged in January, and management continues to report positive progress. A successful acquisition of ZENABIS this year could significantly improve the company’s earnings in 2021. Analysts expect the company’s quarterly revenue run rate to grow by 52% to $50 million by January 2022. Quarterly adjusted EBITDA could increase by 2,083% over the next 12 months.

Share price growth momentum has weakened a bit this month. But the future outlook remains positive and encouraging for long-term investors. One can still buy HEXO’s stock today and profit over the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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