What happened
Shares of HEXO Corp. (HEXO), a licensed Canadian cannabis producer, are on the move, thanks to a positive outlook from an analyst at Bank of America. Investors encouraged by the investment bank's optimism pushed the stock 11.5% higher on Wednesday.
So what
Bank of America initiated coverage of HEXO with a buy recommendation and a $10 price target, which was 66% above the stock's closing price yesterday. The analyst, Christopher Carey, went a step further and named the Quebec-based company a "top pick in cannabis."
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At the top of Carey's list of reasons to like HEXO is the stock's relatively low valuation. The cannabis producer's market cap has risen to $1.4 billion at recent prices, which seems like a lot for a company with annualized revenue of just $40.1 million. (Both figures are in U.S. dollars.) While that's a nosebleed valuation in any other industry, it's still low enough to make HEXO one of the most reasonably priced Canadian cannabis companies trading on U.S. exchanges.
Now what
HEXO has supply agreements with four provincial governments, one of which could be worth 1 billion Canadian dollars in revenue over the next several years.
Looking beyond Canada's borders, HEXO is taking steps to become an international player in a global cannabis market expected to reach CA$630 billion annually. To this end, the company is developing a 350,000-square-foot facility in Greece, which it hopes will soon be able to supply medical marijuana markets now opening up in the EU.
HEXO finished January with CA$224 million in working capital, after operations lost CA$6.9 million during the three months ended January. If the company remains disciplined, it can probably begin producing positive cash flow before resorting to another dilutive share offering.
