In my last article about Sundial Growers (NASDAQ:SNDL) stock, I mentioned how Reddit owners of SNDL stock suggested it was an early-stage version of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) because of its two-track business model.
That might not be the case.
Right there, on page four of Sundial’s latest August 2021 investor presentation, it points out its two-track business model with both cannabis and investment operations.
On the one hand, Sundial has its cannabis operations, which are cleverly depicted in a similar vein to an integrated energy company with (1) upstream (cannabis cultivation), (2) midstream (manufacturing & processing), and (3) downstream (retail) operations.
On the other hand, it has its investment operations with three main areas of interest: (1) SunStream Bancorp — it has committed 538 million CAD ($420.0 million) — (2) Canadian cannabis credit, and (3) select M&A focused equity investments.
Essentially, the company implies that it has six potential revenue streams that will reap the rewards in multiple ways at different points in the future. That is very similar to the Berkshire Hathaway we know today because the massive holding company seems to be consistently generating growth from somewhere.
It’s a true team environment.
The Buffett Comparison
I don’t have a problem with the company portraying its business model in such a manner. It’s easy for investors to wrap their hands around the two tracks. However, I doubt that Warren Buffett, circa 1977, was giving out presentations highlighting such a plan.
If you go back to the 1977 letter to shareholders, you will see that’s not the case.
Here’s what Buffett had to say about the company’s marketable equity securities, which totaled $181.1 million at the end of December 1977:
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price,” stated the 1977 shareholder letter.
In Berkshire’s 1978 shareholder letter, Buffett points out the earnings from its operations accounted for 79% of its overall earnings. The remaining 21% was from realized securities gains.
I have a sneaking suspicion that most Sundial investors aren’t holding out too much hope for the cannabis operations except maybe for the Spiritleaf retail business it recently acquired.
Instead, investors are betting on the three segments from its investment operations being the major contributor to future earnings.
Here’s the Problem With SNDL Stock
Even though Berkshire’s equity portfolio has cumulatively grown by 168,421% over the past 43 years to $305 billion, Berkshire’s operating earnings in 2020 still contributed $21.9 billion of its $42.5 billion in overall earnings in 2020.
So, despite the extraordinary growth in Berkshire’s buy-and-generally-hold portfolio, the operating companies still are a significant portion of the company’s earnings.
And even though Buffett is finding it harder to find large businesses to buy — blame private equity and special purpose acquisition companies (SPACS) — its operating businesses still manage to employ more than 110,000 people.
How many people does Sundial employ? 512 according to its August presentation. Add in an additional 500-1000 from its Spiritleaf acquisition, and we’re talking about 1,500 or so. In Berkshire Hathaway’s 1978 shareholder letter, Buffett said businesses it controlled had 7,000 full-time employees.
How long will it take Sundial to get to 7,000 full-time, not part-time, as is typical in the retail industry? Several years.
Based on $500 million in 1978 revenue, each of Berkshire’s employees generated $71,429. In the trailing 12 months, Sundial generated approximately 50 million CAD ($39.0 million) or $76,172 per employee, or slightly more than Berkshire in 1978.
So, it’s possible that Sundial is on track to become the next Berkshire Hathaway. But, unfortunately, it’s also possible that it’s on its way to being the next Gulf & Western Industries, a failed conglomerate from the 1960s and 1970s.
I’m not sure it’s a good idea to be a Berkshire Hathaway wannabe. Rarely have holding companies been able to duplicate Buffett’s success.
To get me interested in Sundial stock, I’ll have to see a lot more from the operations side of its business. Unfortunately, to date, that’s not been the case.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.