Is Tilray Stock A Buy After Disclosure Of Hexo Acquisition Interest?

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Canadian cannabis producer Tilray (TLRY) in November expressed its interest in buying struggling rival Hexo (HEXO), but Hexo rejected the bid, according to a recent filing. So is TLRY stock a buy now?

The filing, from Hexo, was disclosed in May and reported on earlier by the Deep Dive. A section of the filing described negotiations between the two companies that later led to a deal, struck in April, that could eventually give Tilray a large stake in Hexo and help it untangle its debt. Tilray’s initial proposal in November to acquire Hexo appeared to be an early step in that process.

The filing said Tilray proposed buying Hexo for two to three dollars per share — well above the value of Hexo’s stock at the time. Hexo, however, “concluded that this represented less than sufficient value and rejected Tilray’s offer,” the filing said.

The negotiations with Tilray, however, followed Hexo’s difficulty in finding other suitors.

Hexo, in the filing, said it had tapped BMO Capital Markets to act as a financial advisor to help look for “parties which it believed may have been interested in a potential transaction” with Hexo. In December and January, Hexo and BMO tried to gauge whether any other company had interest in Hexo following Tilray’s proposal. “(H)owever, none emerged,” the filing said.

Hexo also looked at available financing operations. “No suitable financing options
were identified at that time,” the filing said.

TLRY Stock, Hexo Debt

The deal with Hexo is Tilray’s latest pact with a cannabis operator trying to turn itself around. Tilray last year also worked out a similar deal that could eventually hand it a stake in MedMen, a California-based cannabis retailer that has also been trying to get its finances in order.

Hexo has been trying to rein in its debt, following layoffs, losses and facility closures. Other Canadian marijuana stocks have faced similar difficulties, after growing too much cannabis and initially expanding too much abroad.

Under the deal announced in April, Tilray will buy up the remaining $193 million of Hexo’s convertible debt — or debt that can be converted into stock at a certain point — that was held by funds tied to HT Investments.

Tilray can convert the debt to Hexo stock at 85 Canadian cents per share. Doing so would “allow Tilray Brands to acquire a significant equity ownership position in HEXO and participate directly in its considerable growth opportunities,” Tilray said in a statement. The deal also extends the deadline for Hexo’s debt by three years to 2026.

Tilray Earnings

Tilray, in April, said it earned nine cents per share during the third quarter, compared to expectations for an 8-cent per-share loss. Revenue of $151.9 million missed estimates for $156.2 million.

However, the company’s net income got a boost from positive non-operating income, which was driven by changes in the value of its convertible debt and warrant liability.

Cannabis sales came in at around $55 million, amounting to 36% of Tilray’s total revenue. Its distribution revenue was $62.5 million, accounting for 41% of sales. Tilray’s distribution revenue — driven by CC Pharma, which distributes medical cannabis and pharmaceutical products in parts of Europe — generally makes up the biggest share of Tilray’s sales.

The pot producer has banked more on the small but growing legal medical markets in Europe. Tilray said during its conference call that “any revenue generated by CC Pharma for cannabis is accounted for within our international medical sales.”

In its earnings release, Tilray said its international cannabis revenue was “up over 4,000% from the prior year quarter.”

TLRY stock and other marijuana stocks briefly jumped ahead of a House vote on the U.S. federal decriminalization bill known as the MORE Act. The law cleared the House. But its path in the Senate is unclear.

Tilray and other pot stocks on major U.S. exchanges are well down from last year. Competition in Canada, continued losses and executive missteps have kept share prices lower. The meme-stocks craze that drove some cannabis names higher last year has also faded.

Tilray merged with Aphria last year. In December, it bought Colorado-based Breckenridge Distillery, a move that adds to a U.S. presence that consists of a craft brewer and hemp-granola maker, along with the investment in MedMen.

Tilray hopes that it can use the consumer-goods companies it owns in the U.S. as a conduit for introducing THC cannabis products once pot is federally legalized. Some analysts have raised questions about that approach.

TLRY Stock Fundamental Analysis

Earnings growth is a staple of top stocks. The EPS Rating of TLRY stock stands at 70, with 99 being the best possible. Other Canadian marijuana stocks have not-great profit ratings, as they continue to lose money. The EPS Rating is a gauge of a company’s profit growth.

The Composite Rating of TLRY stock stands at 27, according to Marketsmith chart analysis. IBD research says investors should focus on stocks with Composite Ratings of 90 or higher.

Analysts expect Tilray to lose money through this fiscal year, which concludes around the end of May. They see it losing money in the fiscal year after that.

The company’s SMR Rating — or Sales + Margins + Return on Equity rating — is a not-great D. The rating tallies the past three quarters of sales growth, pretax and after-tax profit margins and return on equity.

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Tilray Stock Technical Analysis

TLRY stock began trading in July 2018 on the Nasdaq via an IPO. That IPO was the first on a big U.S. exchange from a pure-play cannabis company.

Shares soared as much as 711% last year, amid the meme-stocks frenzy. But Tilray is still well down from last year. Shares are not in a buy zone, and no new base pattern has formed.