A revenue warning from Hexo Corp. battered the broader cannabis sector on Thursday, sending the stock down 24% and putting it on track for its worst ever one-day percentage loss.
Hexo HEXO, -23.99% surprised the market when it warned of a fiscal fourth-quarter revenue shortfall, citing “lower than expected product sell through.” The company said it was also withdrawing its fiscal 2020 financial outlook, as “regulatory uncertainty” and jurisdictional decisions to limit the availability and types of cannabis derivative products have led to an “increased level of unpredictability.”
The company expects revenue for the quarter to July 31 of C$14.5 million to C$16.5 million ($10.9 million to $12.4 million), well below the FactSet consensus of C$24.8 million.
MKM analyst Bill Kirk said the news was very disappointing, but that the company is still well positioned for the coming launch of derivative products in Canada and that it may be “more of a delay than lost opportunity.
“We believe HEXO’s approach to be the working component of expert partners’ products has the best chance of creating a defensible brand (“Powered by HEXO”). It is a less commoditized approach, which should give them early access to some exciting categories,” the analyst wrote in a note to clients. He highlighted the company’s partnership with brewer Molson Coors TAP, +0.76% as one that offers an early mover advantage in cannabis drinks.
Kirk reiterated his buy rating on the stock and C$12 price target.
In a separate note published Thursday, Kirk said the black market in Canada is thriving a year into legalization — and that’s bad news for the big licensed producers. Provinces are too slow in opening stores and the price gap with legal weed is widening.
On Wednesday, Statistics Canada released crowdsourced price data for the black and legal markets and found an average legal price in the third quarter of C$10.23 a gram, almost double the black market average price of C$5.59 a gram.
“With surveyed consumers showing a strong sensitivity to price, we believe the widening of these price gaps limits the growth and addressable market for current legal product offerings. In combination with slower provincial buying and delayed Ontario openings, we still believe 3Q results for Canadian LPs will likely fall short of consensus expectations,” Kirk wrote.
Tilray Inc. TLRY, -8.21% was down 0.5%, Cronos Group CRON, -4.32% CRON, -3.86% was down 2% and Aurora Cannabis ACB, -5.36% ACB, -4.39% was down 3%. Market leader Canopy Growth CGC, -8.54% WEED, -7.00% was down 3%, after it said David Klein, chief financial officer for Constellation Brands STZ, +0.98%, has become its new chairman. The Corona beer brewer has invested $4 billion in Canopy and has been tightening its grip on the company in the past several months.
In July, Constellation fired Bruce Linton, co-CEO of Canopy, frustrated with the company’s continued losses. In May, it installed Mike Lee, a former CFO, as Canopy’s interim CFO, tasked with overhauling the company’s strategy. On its recent earnings call, Constellation’s CEO Bill Newlands said the company was pleased with the progress Canopy had made in the last few months.
On the regulatory front, Senate Majority Leader Mitch McConnell, a longtime opponent of reforming marijuana laws, is spending more time than usual thinking about cannabis on a trip to California this week, as MarketWatch’s Max A. Cherney reported. McConnell is attending at least two days’ worth of meetings with industry executives and advocates in the Golden State to discuss possible banking reform, among others issues, according to people familiar with the matter.
“I think this is absolutely positive that McConnell is meeting with stakeholders in the cannabis market,” PI Financial analyst Jason Zandberg told MarketWatch. “The U.S. market needs the banking act to flourish, without it — there are legitimate companies that are following the rules that are facing major obstacles. Banking legislation would be a huge positive catalyst.”
For more on this, read: Mitch McConnell meets with pot execs in California, pitched need for cannabis banking reform
Elsewhere in the sector, Green Organic Dutchman shares TGODF, -17.37% TGOD, -18.88% fell 13%, a day after the company said it’s reviewing its financing options for the completion of construction at two facilities. The company said efforts to get commercial bank facilities and equipment leasing have ended because the terms on offer were not acceptable. But the company said it has no debt and $56.7 million in cash available in Canada.
The ETFMG Alternative Harvest ETF MJ, -4.33% was down 1.5%, with 21 of its 38 constituent stocks trading lower. The Horizons Marijuana Life Sciences ETF HMMJ, -5.51% was down 2.5%, with 33 of its 54 components trading lower.
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