Market over reaction.Reviewing the Q3 P&L I see that EBIT from operations (exlcudes financing activity and depreciation) has shown steady improvement over the past three quarters - from (pps) -0.08 in Q1 to -0.04 in Q2, and now -0.01 in Q3. What contributed to the overall loss of -0.04 in Q3 is a $5.5 million (-0.03 pps) loss due to financing activity. This loss is signfificant as it represents an $8 million negative variance from Q2 financing results. This should be a front and centre concern for the new CFO.
I am most impressed by the steady improvement in operating ratio over the past three quarters. This measure represents the operating dollars spent to earn a dollar of gross margin. HEXO has the best of all LPs with respect to this measure going from 2.94 in Q1 to 1.55 in Q2 to 1.09 in Q3.
Based on the above, it is my opinion that the market overreacted to the earnings report especially given HEXO's guidance it will double net revenues in Q4 and remains on target for $400 million in 2020. Is there something else brewing that we should know about that would warrant this selloff? If not, then there is simply no way this minor eps miss warrants the free fall we saw today!