Sundial Growers (NASDAQ:SNDL) has been falling, as I predicted it might in my last article. In fact, SNDL stock is down from around 81 cents on Aug. 3 to 72.57 cents as of Sept 17. True, the stock is now far away from its recent peak close of $1.29 on Jun. 3. However, SNDL is still up over 44% year-to-date (YTD).
I have recently taken a second look at the value of this one of the marijuana stocks, especially after its recent second-quarter earnings release and management commentary. Because of this, we now know how many shares of SNDL are outstanding as of Jun. 30. — and how much cash and investments are on the balance sheet. This allows us to estimate the stock’s per-share value going forward. We can then compare that value to its present price on the Nasdaq.
Here’s what you should know about Sundial Growers moving forward.
SNDL Stock: Where Things Stand
Most recently, this cannabis grower closed its acquisition of Inner Spirit, a retailer and franchisor of Spiritleaf recreational cannabis stores across Canada. So, now Sundial Growers is a vertically integrated cannabis producer and retailer. It has a network that includes more than 100 franchised and corporate-owned locations.
Revenue for the quarter was 9.1 million CAD ($7.09 million), well off its prior-year 20.194 million ($15.7 million) pace. However, with the addition of Inner Spirit, its revenue should be higher next year. For example, according to Seeking Alpha, analysts now forecast sales of $45.2 million this year and $78.1 million next year.
At 5 times sales, that portion of its business would be worth $390.5 million. Plus, the Q2 earnings report indicates there are now, as of Jun. 30, some 2.0289 billion shares outstanding. As a result, the cannabis business is worth at least 19 cents per share. And at 10 times sales? It would be worth 38 cents per share of SNDL stock.
Adding in Sundial’s Cash Value
In addition, Sundial Growers had cash and marketable securities of 1.043 billion CAD at the end of June. However, it paid out 92.6 million CAD in cash for Inner Spirit, reducing the balance to about 950 million CAD.
To be generous, we can add in the value of its “Investments,” which are likely loans to other cannabis companies. So, adding in CAD 62.48 million to the cash and securities balance brings it to 1.013 billion CAD. At the recent exchange rate of 72.54 cents per Canadian dollar, this works out to $734.8 million.
Therefore, this works out to a per-share value of around 36 cents ($734.8 / 2.028 billion shares) for Sundial’s cash and investments. Adding that to its business value of 19 cents (at 5 times sales) equals 55 cents per share. This represents a potential drop of 24% from the Sept. 17 price of 72 cents.
However, we should also note something else. If we value the cannabis business — now that it owns Inner Spirit — at 10 times sales, the per-share value rises to 74 cents (i.e., 36 cents plus 38 cents). That is slightly above the Sept. 17 price for SNDL stock.
Additional Valuation Issues
Hopefully, the company will do a reverse split soon so that there are not so many shares outstanding and the SNDL stock price can rise to a typical number. For example, if the company did a 1-for-10 reverse split, the price would become $7.26 (i.e., 10 times 0.7257) and there would be 10 times fewer shares. I suspect management will do something like this in the near future.
One thing to keep in mind with my valuation, though, is that it does not include two items. First, Sundial has 191.59 million CAD in “Equity accounted investees.” That works out to $139 million and about 6.8 cents per share. Think of this as an added benefit, or a margin of safety.
However, on the negative side, Sundial also made an additional 350 million CAD commitment to Sunstream Bancorp on Jul. 7 for a joint venture. This will reduce its cash per share by $253.89 million or roughly 12.5 cents per share.
In other words, the net value per share falls by 5.7 cents to roughly 68 cents per share (i.e., 74 cents at 10 times sales less 5.6 cents). That implies it is still overvalued by 6.3% from the Sept. 17 market price of 72.57 cents.
Of course, the cash investment might bring in more income, but to be conservative we won’t include that figure.
What to Do with SNDL Stock
Here is the bottom line. SNDL stock is overvalued on a sum-of-the-parts basis. This is a generous valuation by giving the cannabis business a value of 10 times sales, even though it is still unprofitable.
However, Sundial does now have a higher value per share than in my previous analysis. As a result, I don’t see SNDL falling too much further. That will depend on the results that we see from Inner Spirit starting in Q3.
If the company only adds to the cash burn and losses, expect to see it float down further. At that point, Sundial would fall to 5 times sales and its total value would be worth just 49 cents per share (i.e., 19 cents for the business plus 36 cents cash minus 5.7 cents).
On the other hand, if the acquisition turns things around, SNDL stock could be worth buying. This assumes that the stock could be at an inflection point based on future profitability.
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On the date of publication, Mark R. Hake did not (either directly or indirectly) own 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.
