Canadian cannabis producer Sundial Growers (NASDAQ:SNDL) reported continuing cash burn and losses for the first quarter of 2021 on May 11. I now believe SNDL stock will fall to its cash balance, or 33 cents per share. It could potentially go even lower than this as the company spends on acquisitions.
Looking at this year’s data, you can see that Sundial had a massive gain in its share balance for cash in the last 3 or 4 months. But while SNDL has a large cash balance, the company also saw a massive increase in the number of outstanding shares. It has started acquiring money-losing companies as well.
Confusion about Cash
The earnings release said two things about the company’s cash balance (reported in Canadian dollars). The first statement said this:
“$969.5 million unrestricted cash, marketable securities and long-term investments on hand at March 31, 2021 and $1.08 billion at May 7, 2021 with no outstanding debt.”
The second statement lowered the apparent cash balance as of May 7:
“As of May 7, 2021, the Company had an unrestricted cash balance of approximately $752.7 million and total common shares outstanding of 1.86 billion.”
In addition, to add to the confusion, Sundial said that it had an:
“Investment balance of $96.0 million at March 31, 2021 in cannabis-related loans and marketable securities generated income of $15.7 million for the quarter.”
So, this is a little confusing. The $1.08 billion cash and long-term investments balance less the $96 million in “investment balance” equals $984 million. That does not equal the later statement of $752.7 million.
Of course, all of this could have been cleared up with an actual balance sheet in the press release.
Nevertheless, this means that cash per share is $752.7 million divided by 1.86 billion shares or 40.46 cents. But remember, that’s in Canadian dollars. The U.S. dollar amount is therefore 33.18 cents per share using a current exchange rate of USD 82 cents per Canadian dollar.
This implies that SNDL stock could fall from 72 cents today (May 13) to 33 cents, nearly 54% lower.
And there is every reason to believe SNDL will fall to this price, as the company is still burning through cash. This despite its announcement that it had made positive EBITDA (earnings before interest, taxes, depreciation and amortization).
What To Do With SNDL Stock
Analysts don’t seem too worried about the stock dilution. For example, TipRanks says that 4 analysts have an average target of 74 cents per share. Yahoo! Finance has a 91 cents target with 5 analysts as does Seeking Alpha (90 cents).
The problem I have with the company is that it still has no clue about the need to stop burning cash. For example, Seeking Alpha indicates that the cash burn during Q1 was $27.3 million (in US$).
If this continues the company will bleed through another $109 million in cash over the next year, or 133 million in Canadian dollars. That will lower the 795 million CAD balance to just 662 million CAD.
But this does not include any losses from its recent acquisitions. This includes the recent purchase of Spirit Holdings on May 5 for an economic value of 133 million CAD in cash and stock. Spirit has 96 cannabis stores in Canada.
There was no indication on the press release whether the company is profitable nor whether the transaction will add to profits. I assume not. Otherwise, why was Spirit selling to Sundial other than that it has a lot of cash?
This is a long-winded way of saying that you can expect to see SNDL stock trade even below 33 cents per share. If the company does not get control of its cash burn the market will not abide the huge dilution and cash flow losses.
So, I suspect most value-based investors will want to wait until things stabilize at Sundial Growers. SNDL stock is set to fall much further.
On the date of publication, Mark R. Hake did not hold a long or short position in any security mentioned in the article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
