Sundial Growers Inc. (SNDL) is a Canadian adult-use cannabis producer and supplier. The company achieved a milestone on May 11, as it reported positive earnings from operations for the first time in the most recent quarter ended March 31, 2021. Its earnings from operations came in at C$1.70 million ($1.41 million), indicating a substantial improvement from the negative year-ago value. Adjusted EBITDA stood at C$3.30 million ($2.73 million) compared to a loss of C$5.60 million ($4.64 million) in the prior-year quarter. This can be attributed to a substantial decline in operating and SG&A expenses.

As a result, the stock gained 104.9% year-to-date, making it one of the top performers in the cannabis market. Shares of SNDL gained 10.2% over the past year, and 160.8% over the past six months. However, if we take a closer look, SNDL’s stellar financials for the fiscal first quarter is not a result of its operations. The company’s business restructuring policies are the primary driver of this performance.

Here’s what could shape SNDL’s performance in the upcoming months:

Acquisition Synergies

SNDL has been expanding its business operations through acquisitions and joint venture partnerships for quite some time. On May 5, the company signed an agreement to acquire Inner Spirit Holding Ltd. for $131 million. Canada-based Inner Spirit’s SpiritLeaf retail cannabis brand should allow SNDL to expand its product portfolio substantially. However, this merger is expected to provide modest synergies and economies of scale, owing to the different business models of both the companies, as stated in the press release itself.

As part of SNDL’s goal to restructure its business operations to ensure maximum growth opportunities, SNDL acquired more than 10% of the outstanding shares of The Valens Company for $1.97 million on May 4. Earlier in April, SNDL committed $188 million toward its joint venture SunStream Bancorp Inc. with SAF Group. This joint venture was designed to target asymmetrically enhanced risk-return investment opportunities in the cannabis industry.

SNDL’s restructuring policies allowed the company to generate C$2.85 million ($2.36 million) in interest and fee revenue and C$12.90 million ($10.68 million) in investment revenues in the fiscal first quarter ended March 31. Investors should note that these revenues allowed the company to report positive earnings from operations for the first time in history, rather than SNDL’s operations as a cannabis distributor. These developments raise uncertainty regarding SNDL’s strength as a cannabis producer and supplier in the Canadian markets.

Poor Financials

SNDL achieved positive earnings for the first time in history in the fiscal first quarter. However, the company’s revenues declined 29.4% year-over-year to C$9.86 million ($8.16 million) in the fiscal first quarter ended March 31, 2021. Net loss came in at C$134.45 million ($111.29 million), up 254.3% from the same period last year. The company reported a loss of nine cents per share during this period. Net cash outflow from operating activities amounted to C$34.37 million ($28.45 million), up 96.3% from the year-ago value.

The company has restructured its business significantly over the past couple of months. SNDL’s CEO Zach George announced that the company has been liquidating certain inventory and limiting its product offerings in certain markets. At a time when Canadian cannabis flower pricing has been declining, withdrawing from certain markets can be detrimental to the company’s financials. SNDL has emphasized its goal to focus on the profitability and improvement of operational segments. However, the company’s gross margin declined 411% year-over-year to C$1.55 million ($1.28 million) in the last reported quarter.

Trading at a Premium Valuation

SNDL’s forward Price-to-Earnings ratio is negative. Moreover, in terms of forward EV/EBITDA, SNDL is currently trading at 858.13x, significantly higher than the industry average of 16.35x.

Also, SNDL is currently trading at 40.08 times its forward sales estimates, which is 393.9% higher than the industry average of 8.11x. Moreover, its forward Price/Sales multiple is 238.5% higher than its trailing-12-month ratio of 11.84.

Also, the stock’s forward EV/Sales ratio of 24.09 is 247.9% higher than the industry average of 6.93.

Consensus Rating and Price Target Indicate Potential Downside

Of the three Wall Street analysts that rated SNDL, two rated it Hold while one rated it Sell. The stock has a 12-month median price target of $0.85, indicating a 12.4% potential downside from yesterday’s closing price of $0.97. The price target ranges from a low of $0.45 to a high of $1.40.

POWR Ratings Reflect Bleak Prospects

SNDL has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SNDL has a grade of F for Value, Quality, and Sentiment. The stock’s premium valuation, and negative ROE and gross profit margins justify the Value and Quality grades. Moreover, analysts expect the company’s revenues to decline 34.1% year-over-year in the ongoing quarter ending June 2021, in sync with the Sentiment grade.

Of the 230 stocks in the F-rated Medical – Pharmaceuticals industry, SNDL is ranked #228. Beyond what we’ve stated above, you can view additional SNDL Ratings for Momentum, Growth, and Stability here.

Click here to view the top-rated stocks in the Medical – Pharmaceuticals industry.

Bottom Line

SNDL’s impressive momentum and recent financial results have made it one of the most popular adult-use cannabis stocks. However, the company’s business operations and structurization policies have shifted focus from its cannabis sector operations. Its plans to exit markets with weak economic drivers can result in a steep fall in revenues. So, SNDL is best avoided now.

SNDL shares were trading at $1.02 per share on Tuesday morning, up $0.05 (+5.15%). Year-to-date, SNDL has gained 115.42%, versus a 12.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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