Between Election Day 2020 and the end of February, Sundial Growers (NASDAQ:SNDL) rose by roughly 613%. But the rise has been more about external factors than any significant change to the company’s fundamentals. And given the circumstances of its rise, it’d be easy for long-term investors to overlook SNDL stock.
I hope to convince you, at the minimum, to add SNDL shares to your watch list — mainly because of its improved cash position.
What’s behind that rise? There have been two drivers that investors should focus on.
First, SNDL was one of the stocks that’s benefitted from the transfer of power from the Republicans to Democrats. The cannabis industry at large got a boost from expectations that a Democrat-led federal government will legalize cannabis in the United States.
Second, the recent surge in retail investor activities, led by the Reddit forum r/WallStreetBets, has also stoked SNDL stock. Sundial was one of the companies that the forum’s posters have been targeting in a move to upset hedge funders and short sellers and make some money on the way.
Sundial is far from a Wall Street favorite. None of the analysts following the stock rates it a buy — and understandably so. The company is finding it difficult to grow, with revenue declining for four straight quarters through Sept. 30, 2020.
However, I find the company’s significantly improved cash position a reason to monitor SNDL stock.
Stronger Cash Position Underpins SNDL Stock
SNDL stock saw a sharp rise in the days following its Feb. 4 closing of a $74.5 million registered offering. In the announcement post, the Calgary, Canada-based company said it now has $610 million “in unrestricted cash.” That’s more than any of the the top cannabis companies, except Canopy Growth (NASDAQ:CGC) and lower-revenue Cronos Group (NASDAQ:CRON).
|Company||Revenue (TTM)||Cash and Cash Equivalence (quarterly)|
|Aphria||$447.47 million||$144.79 million|
|Canopy Growth||$378.66 million||$646.95million|
|Aurora Cannabis||$211.15 million||$301.44 million|
|Tilray Inc.||$210.78 million||$189.70 million|
|Sundial Growers||$61.88 million||$610 million|
|Cronos Group||$46.72||$1.08 billion|
To be sure, having more cash in the bank doesn’t necessarily make SNDL stock worth buying. But it could mean that management can keep the business running longer than competitors.
As well, there are concerns about Sundial’s strategy of raising cash from stock offerings because of the dilutive effect it has on existing shareholders.
Yet the legal status of cannabis at a national level in the U.S. makes financing difficult. While not technically illegal to offer banking services to a cannabis company, lenders have been reluctant because, as one expert puts it, “it does not fall within the risk profile of the traditional banking industry.”
The result is that cannabis companies have had to rely on venture capital, secondary stock offerings and alternative debt to finance their business. So Sundial isn’t necessarily an outlier in finding creative financing. Most rely on stock offerings to raise capital; Sundial just seems to be overly reliant on this.
Having, hopefully, assuaged concerns related to the reliance on stock issuance for raising capital, let’s examine why Sundial’s improved cash position makes the stock interesting.
Fatter Coffers Enable Expansion Opportunities
For the record, unrestricted cash is money that doesn’t yet have any particular purpose. You don’t need it to cover any imminent liabilities. There aren’t many cannabis companies that can boast of so much hard, unrestricted cash.
In fact, looking deeper, one sees that a large portion of the leading companies’ cash reserves just about covers their current liabilities (i.e., financial responsibilities that must be settled within the next 12 months).
Aphria’s (NASDAQ:APHA) current liabilities stand at $225.64 million, which is more than its cash at hand ($188 million). Of the six companies listed in the table above , Sundial has the lowest level of current liabilities.
That means it can more readily take advantage of opportunities in the cannabis space compared to its competitors.
There’s Big Opportunity in How Sundial Deploys the Cash
I reckon it may be a stretch to call SNDL stock a buy, but I believe it’s one to monitor closely. The “where” and “how” the company deploys its cash hoard would say a lot about the company’s direction. And there’s already some encouragement, with its recent $22 million part equity, part debt investment in Indiva (OtherOTC:NDVAF), a producer for cannabis edibles.
The equity part of the deals means Sundial would own 18.45% of Indiva’s issued and outstanding common shares. This is a relatively inexpensive and simple deal in a company that grew its revenue by over 1,000% in 12 months. Over its last four reporting periods, Indiva posted total revenue of $5.86 million.
On the date of publication, Craig Adeyanju did not have (either directly or indirectly) any positions in the securities mentioned in this article.