breeders of sundials (SNDL 0.00%) is quite controversial for a cannabis stock. Between its meme-driven heyday in 2021 and its subsequent (and unexpected) swing into marijuana investment banking, the one thing it seemingly can’t seem to do is make a profit from selling cannabis.
Still, its eventual diversification into spirits sales follows in the footsteps of some of the industry’s biggest competitors, such as Tilray, many of which are also struggling to be profitable, so it’s important to put Sundial in context. With that in mind, here are three things savvy investors know about the stock and why it might be worth a contrarian buy.
1. The first fruits of the acquisition of Alcanna will be announced shortly
When Sundial completed its purchase of Alcanna, a Canadian private liquor chain, on March 31, the timing meant investors couldn’t see a full quarter’s performance after the company’s first-quarter update. In fact, they were only able to see a single day of sales data – and good luck if you’re planning to extrapolate that to a full quarter. That means when the company reports its second-quarter results on Aug. 12, savvy investors will be clamoring to see just how much Alcanna has actually brought in.
When management announced the acquisition to investors late last year, it claimed that the liquor chain had generated CA$16.4 million in free cash flow (FCF) over the previous four quarters. Assuming the value hasn’t changed all that much over the past year, this won’t help to materially reduce the company’s trailing-12-month cash outflow of CA$151.8 million. If Alcanna is indeed profitable and makes a meaningful contribution to the bottom line, it will help justify the CA$346 million in stock Sundial paid for the acquisition, which will be very positive for the stock.
2. Investment returns aren’t that great anymore
Savvy investors know that Sundial’s diversified business model includes a cannabis investment and banking division, SunStream Bancorp, which already generates fees from its lending and other services. In fact, the division contributed CA$21 million to the company’s income for 2021. But this year’s returns are looking significantly worse, and that could eventually become a problem.
The reason for the poor returns are declining stock prices in the cannabis industry, particularly for companies like farms in the village International, where SunStream is heavily invested. To date, the losses have not been realized as the investments have not been liquidated. However, should a liquidity crunch hit in the future, Sundial could be forced to sell its shares at a hell of a loss.
3. It’s probably at least a little bit underrated
The last thing savvy investors realize about Sundial is that it’s likely a bit undervalued given the market’s lack of information about its Alcanna acquisition. But they also know that the amount of revenue the liquor chain will bring in isn’t even the main reason the stock could be valued for less than it’s actually worth. It is the spirits distribution properties that the market rates at almost nothing.
The company’s price-to-book (P/B) ratio is currently 0.4. This means that the market values the stock as worth less than its tangible assets, such as real estate, would be worth in a hypothetical post-bankruptcy liquidation, which is probably incorrect.
Alex Carchidi does not hold any of the shares mentioned. The Motley Fool has a position in and recommends Village Farms International Inc. The Motley Fool has a disclosure policy.