Sundial Growers (SNDL 0.54%) and AMC Entertainment (AMC 8.23%) couldn't be more different. Whereas Sundial sells marijuana in Canada and writes loans to other cannabis businesses, AMC is a multinational entertainment company known for its vast holdings of theater complexes.
Neither stock is about to make professional investors swoon, even after their strong performance. And, as they've both attracted a lot of press over the last year, predictions about their looming downfall are practically everywhere. Still, there are contrarian arguments in favor of both of these stocks, and I'm of the opinion that one of the pair could eventually flourish. Let's dive in.
Image source: Getty Images.
The case for AMC
AMC took a beating during the pandemic, but it's no secret that a frenzy of Reddit traders has pumped up the stock and perhaps have given the company a new lease on life. With its meme-stock popularity fresh in hand, AMC has issued more shares several times recently, raising $587.4 million in cash on June 3 to make for a total of $1.24 billion in the second quarter alone.
That could be enough for management to start new growth initiatives to revitalize the company's chances. But so far, it looks like AMC is more focused on implementing cost savings that might return it to profitability than it is on finding new opportunities.
Maintaining a large number of theaters worldwide is extremely expensive. Currently, the company is painfully unprofitable, with trailing 12-month operating expenses of $2.13 billion against trailing revenue of $449.2 million. In 2019, before the pandemic forced widespread shutdowns of its theaters, operating expenses were even higher, at $3.25 billion, though revenue was also much higher at $5.47 billion.
To address the situation, AMC recently eliminated all outside contractors while curbing all non-essential marketing and entertainment expenses, both of which should help its bottom line. If the cost-cutting drive is successful over the course of the next year and people continue to return to theaters, it'll be in much better shape, and earnings could rebound.
Still, it's hard to imagine the stock increasing in value significantly more than it already has in the meantime, and there doesn't seem to be a solid path toward long-term revenue growth.
The case for Sundial Growers
While Sundial's quarterly revenue shrank by 29.4% year over year in Q1, its fortunes may be turning. The company's gross cannabis sales are down by 30%, but its income from investments like loans is rising dramatically, yielding $15.7 million Canadian dollars in the first quarter. In the fourth quarter of 2020, it only made CAD$9.3 million. That rapidly growing investment income was made possible by -- you guessed it -- CAD$1.08 billion in cash, generated by issuing new stock in the wake of its popularity on Reddit.
The biggest benefit of issuing loans to other cannabis companies is that Sundial doesn't need to take on pesky overhead costs to turn a profit anymore. So, in the most recent quarter, it was able to report CAD$1.7 million in earnings from operations for the first time.
In the meantime, management has promised to only pursue growing its cannabis revenue if it is profitable to do so. And, as a result of cost-cutting initiatives, it managed to massively reduce its cultivation expenses, from CAD$10 million per month in early 2020 to CAD$4 million per month in the first quarter of this year.
Sundial's costs are falling while the largest segment of its revenue (investments) is rising. Though it's difficult to imagine a rapidly growing Sundial given that its cannabis sales are so weak, the company is trying to make the best of the resources it has, and the plan appears to be working.
It's not even a close call
Sundial is by far a better growth stock than AMC. Aside from lacking a clear strategy for returning to steady growth, AMC's significant financial and business challenges are dramatically curtailing management's room to maneuver.
It may be the case that AMC will slowly return to its pre-pandemic performance, but it's important to remember that COVID-19 is not a thing of the past in much of the world. And the company has $11.05 billion in debt that will need servicing. Over the last 12 months, it reported paying $477.2 million in net interest expenses, and that value may soon rise even further.
In contrast, Sundial could soon be firing on all cylinders, and it won't rely on the slow and unpredictable pandemic reopening process to do so. While it's still a (very) risky stock, it has the advantage of being in more than one line of business. Even if its marijuana sales don't drive earnings, its investment income might be able to carry the company, especially because it won't be burdened by paying off its minimal $1.34 million in debt.
