Buy cannabis stock HEXO for a double, Beacon Securities says

In its third quarter earnings call on Wednesday, management for Molson Coors Brewing Company spoke of its intention to be “among the first on the playing field” of cannabis-infused beverages, an event that analyst Russell Stanley of Beacon Securities says highlights the joint venture Molson Coors created with cannabis company HEXO Corp. (HEXO Stock Quote, Chart TSX:HEXO).

Like many in the cannabis space, HEXO shares have fallen off from highs achieved in the lead-up to legal recreational cannabis in Canada, but the stock has had a significant bounce on Wednesday, up over 11 per cent in late day trading.

Stanley recounts that Molson Coors management predicted that beverage sales should represent between 20 and 30 per cent of annual cannabis sales, representing over $1.5 billion in market opportunity in Canada alone.

“Molson Coors noted that it did not want to be a spectator as the cannabis market develop and expects to take a meaningful market share and be ‘among the first on the playing field’ once this product category is legalized (expected fall 2019). The joint venture with HEXO (called Truss) is researching its product portfolio now, with a view to generating revenue by Q4/19,” Stanley says in a research update to clients.

Stanley notes that earlier on Wednesday, HEXO reported that it had closed on the previously announced acquisition of a 25 per cent stake in a two-million sq. ft. facility in Belleville, Ontario, which the company expects will serve as a centre of excellence for developing advanced cannabis products. The analyst says that the facility will give HEXO a platform for partnering with more Fortune 500 companies in addition to Molson Coors in developing cosmetics, edibles and vape pens.

“HEXO is an elite cannabis player with large-scale, low-cost production capacity, and proven strength in bringing unique value-added products to market,” says Stanley. “HEXO has industry-leading sales visibility, as its supply contract with the SQDC (Quebec’s sole authorized buyer of cannabis for the recreational market) calls for 20,000 kg in year one, representing 80 per cent of HEXO’s current capacity.”

The analyst says that HEXO now trades at 9x his 2020 EBITDA estimate, which represents a 34 per cent discount to its broad group average of 13x and a 75 per cent discount to the average among cannabis companies with market caps over $1 billion.

Stanley reiterates his “Buy” rating and $11.00 target price for HEXO, representing a 106 per cent projected return at the time of publication.