The Consensus EPS Estimates For HEXO Corp. (TSE:HEXO) Just Fell Dramatically

Market forces rained on the parade of HEXO Corp. (TSE:HEXO) shareholders today, when the analysts downgraded their forecasts for this year. Both revenue and earnings per share (EPS) estimates were cut sharply as analysts factored in the latest outlook for the business, concluding that they were too optimistic previously.

After the downgrade, the eleven analysts covering HEXO are now predicting revenues of CA$238m in 2022. If met, this would reflect a huge 93% improvement in sales compared to the last 12 months. Losses are forecast to narrow 3.9% to CA$0.35 per share. Yet prior to the latest estimates, the analysts had been forecasting revenues of CA$266m and losses of CA$0.31 per share in 2022. So there's been quite a change-up of views after the recent consensus updates, with the analysts making a serious cut to their revenue forecasts while also expecting losses per share to increase.

See our latest analysis for HEXO

The consensus price target fell 9.8% to CA$2.43, implicitly signalling that lower earnings per share are a leading indicator for HEXO's valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic HEXO analyst has a price target of CA$8.00 per share, while the most pessimistic values it at CA$1.00. So we wouldn't be assigning too much credibility to analyst price targets in this case, because there are clearly some widely differing views on what kind of performance this business can generate. As a result it might not be possible to derive much meaning from the consensus price target, which is after all just an average of this wide range of estimates.

One way to get more context on these forecasts is to look at how they compare to both past performance, and how other companies in the same industry are performing. It's clear from the latest estimates that HEXO's rate of growth is expected to accelerate meaningfully, with the forecast 140% annualised revenue growth to the end of 2022 noticeably faster than its historical growth of 63% p.a. over the past five years. Compare this with other companies in the same industry, which are forecast to grow their revenue 29% annually. Factoring in the forecast acceleration in revenue, it's pretty clear that HEXO is expected to grow much faster than its industry.

The Bottom Line

The most important thing to note from this downgrade is that the consensus increased its forecast losses this year, suggesting all may not be well at HEXO. Unfortunately, analysts also downgraded their revenue estimates, although our data indicates revenues are expected to perform better than the wider market. After such a stark change in sentiment from analysts, we'd understand if readers now felt a bit wary of HEXO.

After a downgrade like this, it's pretty clear that previous forecasts were too optimistic. What's more, we've spotted several possible issues with HEXO's business, like major dilution from new stock issuance in the past year. For more information, you can click here to discover this and the 2 other concerns we've identified.

Another way to search for interesting companies that could be reaching an inflection point is to track whether management are buying or selling, with our free list of growing companies that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.