Sundial Growers (SNDL 3.12%) is pretty controversial for a cannabis stock. Between its meme-driven heyday in 2021 and its subsequent (and unexpected) pivot into marijuana investment banking, the one thing it can't seem to do is make a profit by selling cannabis.
Still, its later diversification into selling liquor follows in the footsteps of some of the industry's largest contenders, like Tilray, many of whom are also struggling to be profitable, so it's important to view Sundial in the right context. In that vein, here are three things that smart investors understand about the stock and what might make it worth a contrarian purchase.
1. The first fruits of the Alcanna acquisition will be revealed soon
When Sundial's purchase of Alcanna, a Canadian private liquor store chain, closed on March 31, the timing meant that investors didn't get to see a full quarter's worth of its performance after the company's first-quarter update. In fact, they only got to see a single day of sales data -- and good luck if you plan on extrapolating that to a full quarter. That means when it publishes its second-quarter earnings on Aug. 12, smart investors will be clamoring to see how much Alcanna actually brought in.
When management announced the acquisition to investors late last year, it claimed that the liquor chain had made 16.4 million Canadian dollars in free cash flow (FCF) over the prior four quarters. Assuming that value hasn't changed by too much over the last year, it won't help to reduce the company's trailing-12-month cash outflow of CA$151.8 million by much at all. Still, if Alcanna is indeed profitable and contributing meaningfully to the bottom line, it'll help to justify the CA$346 million in stock that Sundial used to pay for the acquisition, which will be strongly positive for the stock.
2. Investment income isn't looming as large anymore
Wise investors know that Sundial's diversified business model includes a cannabis investment and banking division, SunStream Bancorp, which is already generating fees from its loans and other services. In fact, for 2021, the division contributed CA$21 million to the company's income. But this year's returns are looking significantly worse, and that could eventually become a problem.
The reason for the poor returns is declining share prices in the cannabis industry, specifically in companies like Village Farms International, where SunStream is heavily invested. So far, the losses are unrealized, as the investments haven't been liquidated. If there's a cash crunch in the future, however, Sundial might be forced to let go of its shares at a devilishly steep loss.
3. It's probably undervalued at least a little bit
The final thing that smart investors recognize about Sundial is that it is likely a bit undervalued as a result of the market's lack of information regarding its Alcanna acquisition. But they also know that the amount of revenue the liquor chain will bring in isn't even the main reason why the stock could be priced for less than it's actually worth. It's the liquor distribution real estate that the market is valuing at next to nothing.
Right now, the company's price-to-book (P/B) ratio is 0.4. That means that the market appraises the value of the stock as being worth less than its tangible assets like real estate would be worth in a hypothetical post-bankruptcy liquidation, which is probably not accurate.
