After experiencing a riotous run-up during the meme stock mania of 2021, SNDL's (SNDL 3.08%) shares are now down about 70%. However, there's reason to believe that shareholders are on the brink of getting a much-needed reversal of the Canadian cannabis company's fortunes.
While it's still unprofitable, SNDL is now potentially within a few quarters of changing that, and its shares look cheap, too. Is the turnaround finally here and the stock ripe for purchase, or is there more to the story?
Things are a lot better and might continue to improve
Originally, SNDL's focus was on serving the Canadian recreational marijuana market. That model brought it fame among retail investors, which enabled it to issue a tremendous amount of stock and gain access to a significant amount of capital. In Q2 of 2021, it boasted nearly 1 billion Canadian dollars ($750 million) of cash and investments. But soon thereafter, cannabis prices in the Canadian market imploded amid an excess of supply, and hard times descended on the company.
With plenty of money but an unprofitable core operation, management's focus shifted to lending to or acquiring smaller competitors in the cannabis industry while making major moves to buy up alcohol companies, too. As of this year's third quarter, SNDL's alcohol sales brought in CAD$152 million, whereas its marijuana sales and other marijuana-related activities only brought in about CAD$96 million. It also reported close to CAD$10 million in investment income from its SunStream Bancorp lending and marijuana investment banking arm.
The SNDL of today looks dramatically different from before and is also significantly more insulated from market dynamics because it now competes in more than one industry. That's a significant point that could contribute to a company turnaround, as it didn't need to sacrifice its existing business to diversify.
Realizing cost synergies and efficiencies related to its cannabis acquisitions may save SNDL as much as CAD$40 million by 2024. Similarly, it's in the process of adjusting its marijuana product offerings by shedding low-margin items and promoting higher-margin alternatives.
Soon enough, it could start to report growing operating profits and perhaps even consistent free cash flow (FCF), or what's left of cash flow after paying for business investments and capital expenditures. That assumes it can continue to reduce its operating expenses, which were CAD$289 during the last 12 months. From where it is today, it's even possible to imagine that SNDL could start paying a dividend at some point in the next five to 10 years.
One final factor supporting the prospects of a turnaround in the future is the company's valuation. Its price-to-book (P/B) ratio is less than 0.4, which suggests that the market is pricing the company for less than the value of the assets listed on its balance sheet. In other words, if you buy shares, you're effectively buying $1 of SNDL's assets for $0.40. Once the market recognizes the progress SNDL has made, investors who bet on the turnaround thesis could get a big payout.
Risks are receding but aren't anywhere near being negligible
The main challenge with buying SNDL stock at the moment is that the market seriously disfavors anything approximating a cannabis stock, especially those that do business primarily in Canada. Therefore, buying the shares now -- even in the wake of significant operational improvements and a guardedly positive outlook for the coming quarters -- is still risky, even before considering whether the company's increasing efficiency will yield a cash-flow positive company in the long run.
Furthermore, while SNDL's alcoholic beverage segment is going to continue being an instrumental part of cash generation, it probably isn't going to be a major driver of top- or bottom-line growth. After all, the company doesn't have a monopoly on selling alcohol in Canada, and Canadian consumers are probably not going to massively increase their demand for booze. While the company may currently or eventually own either cannabis or alcohol brands with a competitive advantage as a result of strong consumer preferences for specific products, there's no evidence of that happening in either segment.
Nonetheless, SNDL's turnaround seems to be drawing nearer. It's undeniable that the company is a much less risky investment today than it was in the past, as its current base of revenue is spread between two segments that consumers will keep returning to again and again. If you're willing to take on a good deal of risk, it's worth investing now, even though its actual turnaround, as defined by reaching consistent operational profitability, remains unrealized.
