Sundial Growers (NASDAQ:SNDL) has had a rough time in the market lately. Right now, SNDL stock is down about 37%, way off of its recent peak close of $1.29 on Jun. 3. However, at a close of 81.5 cents per share on Aug. 2, this name is still up an amazing 72% year-to-date (YTD) from that price.
In my last article on Sundial, I argued that the stock was still overvalued, as I estimated it was worth no more than 57 cents per share. This included 1.1 billion CAD ($876.7 million) in cash and loan assets. At the time, SNDL stock was at $1.05 per share and has since fallen roughly 22% to 81.5 cents. So, the stock is now getting closer to its underlying value.
But, of course, we will need to wait until the company produces its next quarterly balance sheet to derive its final valuation. For example, Sundial just purchased the issued and outstanding common shares of Inner Spirit Holdings, a public retail Canadian cannabis network. In addition, SNDL made a commitment to Sunstream Bancorp, a joint venture with a private equity fund, for 538 million CAD ($428.9 million) in backup funding.
Those two deals could use up a large portion of the company’s remaining cash once they are closed. So, unless Sundial turns super-profitable very soon, expect to see major dilution and lower earnings as a result.
Where This Leaves SNDL Stock
Sundial Growers has a money-losing cannabis business. For example, its first-quarter revenue was down 29% to 9.89 million CAD ($7.88 million). However, it also saw negative 3.4 million CAD ($2.7 million) gross profit. That means the company is going to have a hard time pulling itself out of negative territory.
Maybe the Spirit acquisition can help Sundial do that. Inner Spirit is a franchisor operator of recreational cannabis with over 100 stores. A recent Seeking Alpha article about the deal argues that this will improve Sundial’s persistently low margins and help the company achieve profitability.
Plus, another catalyst could happen for SNDL stock if the U.S. ever legalizes cannabis on the federal level. This could allow SNDL to expand its operations in the U.S. and export across the border. However, I think that’s going to take a long time to happen — and probably longer than most people realize.
What to Do with SNDL Stock
Most analysts are generally negative on SNDL stock. For example, Yahoo! Finance indicates that four analysts have an average price target of 60 cents per share. That is more than 26% below the Aug. 2 price. Moreover, Tipranks notes that two analysts have an average price target of 75 cents. That represents an 8% potential decline in the stock.
These are not hopeful signs for SNDL. Perhaps the new acquisition will be able to help turn things around for the company. I suppose if the upcoming earnings provide evidence for this — especially if the company can provide guidance — then analysts might consider raising their forecasts.
And altogether, it’s good that the stock has been falling as I suspected it would. However, most investors will probably want to wait for Q2 earnings to come out before diving in, which could take a while.
Lastly, if the financial release shows that Sundial’s cash per share has fallen a good deal, the markets may not like it. This could imply that a further capital raise might be needed down the road. The ensuing dilution effect on the outstanding share balance could drag SNDL stock further. Until then, though, wait until the stock drops to around 57 cents per share.
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On the date of publication, Mark R. Hake did not (either directly or indirectly) hold a position in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
