Only two months since peaking at around $52 a share, Pyxus International (NYSE:PYX) is on the move again. On Jan 30, the stock rose 26% on no news. Perhaps speculators who missed out on the enormous rally in marijuana stocks are now looking at PYX stock. Or maybe the rebound in tobacco firms validates betting on Pyxus. So the question is, should you buy this stock today?
Pyxus rose to the $52 level when, in October 2018, Citron wrote that Pyxus “has most to gain with a defined plan and management never seen before in Cannabis.†In the month that followed, the stock lost all of those gains due to fundamentals. The firm posted third-quarter results that showed a serious deceleration in its business. Sales fell 12% from last year to $395 million. It struggled because of lower volumes and lower gross margins.
With such weak figures, why should investors even consider this company?
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Pyxus reported weak Q2 numbers because it was a seasonally lower period for its business. Volumes fell in the period due to shipment timing, tougher year-over-year comparisons and the stronger U.S. dollar. The firm also faced foreign tariffs and increased tariffs on U.S. tobacco. This resulted in a net negative impact to operating income totaling $25 million for the full year.
For Q2, the company lost $55.4 million, while adjusted EBITDA came in at $45.3 million.
A delay in marijuana legalization in Canada delayed sales into the Q3 period. Since the company is scheduled to report results on Feb. 7 before market open, one might guess the markets are betting that Pyxus will realize cannabis sales and improved hemp sales.
However, chances are good that the third quarter will benefit from a reversal from the seasonal Q2 weakness. Typically, product shipment picks up in the third and fourth quarter. So long as Pyxus had a good season in South America, it may realize higher revenue from the increased output.
An increase in its building square footage is another positive catalyst for Pyxus. It had a delay in opening its facility, which also delayed shipments. With this issue resolved, it should achieve a stronger performance in many key geographies. These include Zimbabwe, Malawi, Uganda, Europe, Canada, the U.S. and Argentina.
Pyxus is very ambitious with its supply output targets. An astute investor will notice that the firm has a market cap of around $130 million. And its balance sheet is not pretty: its debt to equity is 7.15 times, while its long-term debt/equity sits at 4.25 times. As mentioned many times already, the firm is growing its capacity, growing its volume, and is expanding into more provinces to increase its facility space.
Pyxus has one notable facility in Prince Edward Island. On its conference call, it said it aimed to have another 300,000 square feet by the end of Dec. 2018. On its next call following its Q2 report, the firm should give an update on its status. And the growth in facilities does not stop there. Goldleaf has 200,000 square foot and could add another 700,000 square feet for this coming summer.
The markets may have eased up on selling tobacco stocks like Phillip Morris International (NYSE:PM), Altria Group, Inc. (NYSE:MO) or British American Tobacco (NYSE:BTI). Fundamentally, though, tobacco is a negative headwind for Pyxus. Tobacco costs are going up and face tariffs. And even though tobacco-related SG&A fell year-over-year in Q2, gross profits are still falling.
Pyxus is certainly compelling for speculators because it has the potential to grow its revenue levels. If management fills those warehouse spaces with goods, it just might deliver on an acceleration in revenue.
Short-sellers started backing off, lowering their short interest from 2.94 million shares on Dec. 30, 2018, to 2.53 million by Jan. 14. If the company reports better results in its earnings report, the 26% rally in PYX stock may hold up.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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