The stock of HEXO (NYSE:HEXO, 30-year Financials) is estimated to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $6.6 per share and the market cap of $809.5 million, HEXO stock is believed to be possible value trap. GF Value for HEXO is shown in the chart below.
The reason we think that HEXO stock might be a value trap is because
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. HEXO has a cash-to-debt ratio of 1.48, which is in the middle range of the companies in Drug Manufacturers industry. The overall financial strength of HEXO is 5 out of 10, which indicates that the financial strength of HEXO is fair. This is the debt and cash of HEXO over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. HEXO has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $84 million and loss of $1.405 a share. Its operating margin is -66.61%, which ranks worse than 80% of the companies in Drug Manufacturers industry. Overall, the profitability of HEXO is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of HEXO over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of HEXO is 55.1%, which ranks better than 93% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is -99.5%, which ranks in the bottom 10% of the companies in Drug Manufacturers industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, HEXO's return on invested capital is -14.18, and its cost of capital is 13.32. The historical ROIC vs WACC comparison of HEXO is shown below:
In summary, The stock of HEXO (NYSE:HEXO, 30-year Financials) is estimated to be possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Drug Manufacturers industry. To learn more about HEXO stock, you can check out its 30-year Financials here.
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