Next week, HEXO Corporation (TSX: HEXO) (NYSE: HEXO) will report third quarter financial results. This comes a few weeks after Canopy Growth (TSX: WEED) (Nasdaq: CGC) reported weaker-than-expected earnings and we expect the market to be highly focused on how HEXO performed after Canopy Growth highlighted a few risks in the Canadian market.
When compared to Canopy Growth, HEXO has a much smaller operating footprint (domestically and internationally) and has been highly focused on the cannabis 2.0 recreational market in Canada as well as strategic international cannabis markets like Israel. Earlier this year, Israel overtook Germany as the largest importer of medical cannabis and are favorable on this market.
In late 2019, Health Canada approved the sales of cannabis 2.0 products (i.e. edibles, beverages, vape pens, concentrates, and more) and we are bullish on the vertical due to the higher price point and margins (on average). We believe that consumer demand for these products has remained strong and expect HEXO to benefit from having a model that is highly focused on the cannabis 2.0 vertical.
2021 is proving to be a transformation year for HEXO as it has been executing on a bolt-on acquisition strategy. Each acquisition has leverage to specific growth verticals of the cannabis value chain and we will monitor how the management team is able to integrate the assets over the next year.
Earlier this week, HEXO announced a commitment to offsetting its operational carbon emissions and the personal emissions of all 1,200 employees (which is estimated on personal emissions that are based on the average Canadian’s emissions from heating and powering their homes, driving and food consumption) making it 100% carbon neutral from September onwards.
This comes a few weeks after HEXO reported to have entered into a partnership with REQ, a leader in digital marketing and brand reputation, to expand its footprint in the US. We are favorable on how the Canadian cannabis company has focused on the US cannabis industry and believe that its joint venture with Molson Coors will play a key role in how it enters strategic US markets.
Specifically, REQ will help HEXO support the growth initiatives of Truss CBD USA as well as help secure strategic relationships with non-beverage consumer package goods (CPG) companies. In future quarters, HEXO should report increasing revenue from the US market and we expect this focus to play an important role in the success of the entire business.
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