Ok Guys, as I mentioned, this is a big topic so I will be unable to post every single detail on how this works, will post what I can. The PS-Ratio is one of many ways to evaluate a stock so explore others as well, for example the EBITDA measure which will helps investors determine a company's progress towards profitability / progress against paying down debt etc.
The Price-to-Sales Ratio allows investors to compare companies to one another to see what is being paid per share of one company to another based on sales being pulled in by each of the two companies. Each sector has it's own range on PS-Ratios as to how the market prices shares. One sector may see very low numbers while other sectors are much higher. The Cannabis sector has some pretty varying PS-Ratios. You can compare the PS-Ratio on different companies by using the following link (others exist, I am sure, so do some poking around). Note Cronos is showing a PS-Ratio extremely high compared to even Canopy Growth and is only producing apx 13 Million CDN in Qtrly sales.
Link to PS-Ratio Data https://ycharts.com/companies/HEXO.TO/ps_ratio
Link to how to use PS-Ratio https://www.investopedia.com/articles/fundamental/03/032603.asp
The best approach (IMHO) to determine a fair value of HEXO shares is to find a comparible company and then compare the PS-Ratio of HEXO to that company. I have selected Canopy Growth as the comparison stock due to two companies having very similar partners, similar product offerings, markets and market expansion plans, both are Canadian as well so that makes things much easier.
-- All amounts stated in
CDN Dollars --
The PS-Ratio of Canopy Growth in 2021 has varied greatly between 20 to just over 50. HEXO has been trading at a PS-Ratio of apx 7 to 11. To be conservate on a reasonable pricing comparison I am opting to do my math based on PS-Ratio of 20. There is nothing to say that the PS-Ratio of HEXO will not hit 50 or more but to be conservative we can use the lower end ratios (historic high PS-Ratio on HEXO is 244, back in 2018/19). If we see US legalization occur we may start seeing these higher PS-Ratios starting to appear on Cannabis stocks once again.
There are two ways to calculate PS-Ratio with the trailing 4 QTR (12 month) method being the one I tend to use myself.
Based on my own numbers with a PS-Ratio of 20 on HEXO I am currently seeing a fair value of HEXO shares at $25.15 CDN. The next QTR report is coming out in early June (date TBD) however when I add in a 8% QoQ growth I can project out a fair market value of HEXO shares at $28.26. These numbers do not account for Zenabis...
When we add Zenabis into the formula I am seeing the following:
PS-Ratio of 20 (HEXO + Zenabis Combined) I am getting $35.91.
PS-Ratio of 20 (HEXO + Zenabis + 48 North Combined) I am getting $37.59
If we extend the above out to a PS-R of 50 the SP shows HEXO easily winning the race to being the first to $100 CDN.
PS-Ratios do not guarentee shareprice nor does it provide anything in regards to timing therefore it is unreasonable to expect these prices will hit immediately, however as HEXO closes each deal and the sales figures from Zenabis, 48 North and Redecan start showing up on HEXO QTR reports the prices become more likely. Never expect a sp to go straight up and never fall back, the market sets the price, not anyone's view on fair value etc. The final deal to close for HEXO is the Redecan acquistion and this is currently projected out to the
3rd QTR of 2021.
The data I used for the above calculations is as following
Note: Fiscal reporting periods and the calendar year are often different so I align QTRs based on most recent then trailing 3 QTRs prior
HEXO Trailing 4 QTR Sales | | |
| 2020 Q3 Sales | $30,900,000 |
| 2020 Q4 Sales | $36,100,000 |
| 2021 Q1 Sales | $41,300,000 |
| 2021 Q2 Sales | $45,678,000 |
Zenabis Trailing 4 QTR Sales | 2020 Q1 Sales | $22,361,000 |
| 2020 Q2 Sales | $30,280,000 |
| 2020 Q3 Sales | $28,490,000 |
| 2020 Q4 Sales | $16,179,000 |
48 North Trailing 4 QTR Sales | 2020 Q3 Sales | $2,806,000 |
| 2020 Q4 Sales | $4,500,000 |
| 2021 Q1 Sales | $6,813,000 |
| 2021 Q2 Sales | $7,607,000 |
HEXO Outstanding Sharecount Zenabis Outstanding Shares + Converted to HEXO ShareCount (based on .01772 conversion rate) 48 North Outstanding Shares + Converted to HEXO Sharecount (based on .02336 conversion)
Please double check the QTR sales figures using either information from your broker or pulling it from the actual QTR reports from each company. Also double check and confirm for yourself the sharecounts from each company as well as the conversion ratios.
This is a forum folks, in a perfect world we help each other progress our knowledge and research for our investments. If anything I have posted here is incorrect, please let me (and others) know.
IMHO much of what determines the price of shares in the Cannabis sector is news coverage. HEXO has fallen out much of the media coverage since the hay-days of Cannabis legalization back in 2018 / 2019. With recent news of the Zenabis, 48-North and Redecan deals we may start seeing HEXO get much more news coverage hence interest in the stock. Once interest comes back I suspect news will start turning to comparing fundamentals of the stock compared to Canopy Growth and the prices will start to align more on the PS-Ratio basis.
JMHO / DYODD
Q
PS. We have the investors deck from HEXO regarding the Redecan acquistion that states 58 Million in qtrly sales from Redecan. As I do not have the previous 3 QTRs from Redecan I have excluded a projection of pricing with Redecan included. Over the coming days I will try to set some time aside to add Redecan in.