Will Cannabis 2.0 Save Hexo Stock?

Despite the promising launch of Cannabis 2.0 products next week, a stock like HEXO (HEXO) still trades at yearly lows down 75% from the highs. The Canadian cannabis company has a strong product lineup and a major joint venture in beverages to fuel the business in 2020.

Cannabis 2.0

HEXO has had a disastrous year so the launch of Cannabis 2.0 couldn’t happen soon enough. The company has a high-profile beverage joint venture with Molson Coors (TAP) offering considerable upside for the stock valuation.

In addition, HEXO has submitted applications for multiple other product categories including cannabis topicals, extracts and edibles. The 60-day notification to Health Canada started on October 17 with an expected ability to start distributing the products next week on December 17.

The main thrust of the Cannabis 2.0 lineup is the Truss Beverage Co. joint venture with Molson Coors. The global cannabis infused beverage market is estimated at reaching $5.9 billion and the partnership with a major distributor of alcohol beverages provides a strong position to attack theglobal marketopportunities with both THC and CBD drinks.

HEXO only owns 42.5% of the JV with Molson Coors holding the other 57.5% of Truss so the sales from the JV won’t show up on the income statement or within analyst estimates. The other products including Flow Glow Beverage sales will show up on key financial reports.

With the Original Stash product and the partnership with a beer company, HEXO is attacking the value mass market while others appear focused on the premium markets to match a craft brew target consumer. For this reason, HEXO is a company to watch at whether the company can drive sales by attracting consumers from the illegal markets as the majority of the cannabis market potential sales are in the mid-market and value mass markets.

Targets

The biggest part of valuing HEXO is that their JV with Molson Coors is a substantial part of the business prospects while not included in analyst estimates. The stock has a market value of $575 million while analysts forecast FY21 (July) revenue estimates of $170 million.

HEXO trades at a reasonable 3x forward revenue targets. The Truss Beverage JV isn’t included in sales and could provide a substantial portion of the valuation assigned to the stock. Even a limited value for the JV would quickly place the remaining HEXO business as trading at only 2x sales.

In this space, the Canadian cannabis LPs have a major head start over the U.S. players as companies like Molson Coors and AB InBev (BUD) are unable in invest in U.S. firms looking to tackle the THC beverage market. HEXO offers the stock with the highest percentage of the value assigned to the beverage portion of the business providing the most upside, if cannabis infused beverages perform as expected on a global basis.

Takeaway

The key investor takeaway is that HEXO is set for upside with their big JV finally turning into an operating business next week. The company reports FQ1 earnings before the open on December 16 providing more visibility into the Canadian cannabis market heading into year end. If the company can project a return to growth with the current quarter, the stock should rally from the $2 level.

Check out these 5 ‘Strong Buy’ stocks that top Wall Street analysts recommend

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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