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Oct. 12, 2019, 12:19 p.m. EDT

Hexo revenue warning slams cannabis sector as stock tumbles 24%

MKM warns that Canadian LPs are facing earnings pressure as black market continues to thrive one year into full legalization

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By Ciara Linnane, MarketWatch


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Hexo’s warning sent shivers across the cannabis sector on Thursday

A revenue warning from Hexo Corp. battered the broader cannabis sector on Thursday, sending the U.S.-listed stock down 24% and putting it on track for its worst-ever, one-day percentage loss.

Losses accelerated late in the session as concerns about the sector’s ability to start creating profits against a background of a thriving black market in both the U.S. and Canada took hold.

Hexo /zigman2/quotes/206508254/composite HEXO -5.29%  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 /zigman2/quotes/205165133/composite TAP +2.38%  as one that offers an early mover advantage in cannabis drinks.

Read: Sundial sued in U.S. for failing to disclose half-ton of cannabis was returned by client

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. /zigman2/quotes/209129655/composite TLRY +0.61%  was down 12%, Cronos Group /zigman2/quotes/206842762/composite CRON -7.92%   /zigman2/quotes/202715342/delayed CA:CRON -7.42%  was down 7% and Aurora Cannabis /zigman2/quotes/210559470/composite ACB -17.02%   /zigman2/quotes/203734337/delayed CA:ACB -18.04%  was down 7%. Market leader Canopy Growth /zigman2/quotes/200603886/composite CGC -3.22%   /zigman2/quotes/202205609/delayed CA:WEED -3.20%  was down 9%, after it said David Klein, chief financial officer for Constellation Brands /zigman2/quotes/207737284/composite STZ -1.76% , 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.

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Read now: Canopy Growth’s remaining CEO talks about pot company’s shake-up, and the search for his replacement

Frustrated with losses,Constellation in May installed Mike Lee, a former CFO, as Canopy’s interim CFO, tasked with overhauling its strategy. And in July, it fired former co-CEO of Canopy, Bruce Linton.

/zigman2/quotes/206508254/composite
US : U.S.: NYSE
$ 1.79
-0.10 -5.29%
Volume: 3.69M
Nov. 15, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$511.45 million
Rev. per Employee
N/A
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/zigman2/quotes/205165133/composite
US : U.S.: NYSE
$ 52.52
+1.22 +2.38%
Volume: 1.83M
Nov. 15, 2019 6:30p
P/E Ratio
74.20
Dividend Yield
4.34%
Market Cap
$11.24 billion
Rev. per Employee
$606,738
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/zigman2/quotes/209129655/composite
US : U.S.: Nasdaq
$ 19.93
+0.12 +0.61%
Volume: 2.03M
Nov. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.04 billion
Rev. per Employee
$62,689
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/zigman2/quotes/206842762/composite
US : U.S.: Nasdaq
$ 6.28
-0.54 -7.92%
Volume: 17.38M
Nov. 15, 2019 4:00p
P/E Ratio
14.17
Dividend Yield
N/A
Market Cap
$2.48 billion
Rev. per Employee
$55,248
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/zigman2/quotes/202715342/delayed
CA : Canada: Toronto
$ 8.36
-0.67 -7.42%
Volume: 1.80M
Nov. 15, 2019 4:00p
P/E Ratio
14.13
Dividend Yield
N/A
Market Cap
$3.28 billion
Rev. per Employee
$70,780
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/zigman2/quotes/210559470/composite
US : U.S.: NYSE
$ 2.73
-0.56 -17.02%
Volume: 57.45M
Nov. 15, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.65 billion
Rev. per Employee
$94,401
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/zigman2/quotes/203734337/delayed
CA : Canada: Toronto
$ 3.59
-0.79 -18.04%
Volume: 27.19M
Nov. 15, 2019 4:15p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.82 billion
Rev. per Employee
$123,163
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/zigman2/quotes/200603886/composite
US : U.S.: NYSE
$ 15.33
-0.51 -3.22%
Volume: 8.34M
Nov. 15, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$6.44 billion
Rev. per Employee
$115,039
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/zigman2/quotes/202205609/delayed
CA : Canada: Toronto
$ 20.29
-0.67 -3.20%
Volume: 2.08M
Nov. 15, 2019 4:23p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$8.51 billion
Rev. per Employee
$150,142
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/zigman2/quotes/207737284/composite
US : U.S.: NYSE
$ 179.65
-3.21 -1.76%
Volume: 1.85M
Nov. 15, 2019 6:30p
P/E Ratio
46.58
Dividend Yield
1.67%
Market Cap
$34.83 billion
Rev. per Employee
$842,260
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