Sundial Growers (NASDAQ:SNDL) reports its Q3 2021 results on Nov. 11. While its proposed acquisition of Alcanna (OTCMKTS:LQSIF) for $278 million almost certainly strengthens the company’s overall investment attractiveness, I do think owners of SNDL stock shouldn’t look too far in the future.
If you manage your expectations over the next 6-12 months, I believe you’ll be happy with your investment. If you expect too much from the Alcanna deal, you’ll be sorely disappointed.
Several InvestorPlace contributors have discussed the Alcanna acquisition in recent weeks. I did on Oct. 27, suggesting the combination of the liquor and cannabis retailer with Spiritleaf, the company’s large cannabis retailer, made it far more investable.
On Nov. 1, David Moadel highlighted the fact Alcanna generated positive free cash flow for the trailing 12 months (TTM) of $16.4 million, providing Sundial’s overall business with a “‘mature and proven business model.’” No kidding.
Alcanna’s TTM revenue through Oct. 25 was $508.63 million with $71.81 million in net income. That’s a real business. Add it to Spiritleaf, and you’ve got something.
Although, as I said in July, I have a nagging issue with Sundial.
It doesn’t seem to have a “North Star” other than spending money on cannabis-related companies. However, the Alcanna move suggests it aims to be a more significant player in North American liquor and cannabis retail. Perhaps it will make a move south of the border to signal its ambitions go beyond Canada.
As I’ve already said, this acquisition gives Sundial street cred. I don’t think investors are asking who Sundial Growers is anymore. So it provides the company with a few quarters to complete and integrate Alcanna while plotting a longer-term strategy that is easy to sell to investors.
If it does that, I don’t think there’s any question it will hit $1 in the future.
Alcanna + Spiritleaf = $1 SNDL Stock
In the previous section, I mentioned Alcanna’s revenue, net income, and free cash flow. Relative to Sundial, they’re impressive. However, if you study Alcanna’s history, you’ll see that it hasn’t all been a bed of roses.
In 2016 and 2017, when it was known as Liquor Stores N.A., the company went through a proxy fight with Toronto-based investment firm PointNorth Capital. In 2016, PointNorth acquired more than 10% of its stock. In May 2017, PointNorth launched its proxy fight to put six directors on the board.
“‘Liquor Stores can become a significantly better performing business,’ PointNorth said. The fund, which is backed by the Ontario Municipal Employees Retirement System, said Liquor Stores lost its way by investing $50-million in U.S. expansion ‘while neglecting its Canadian assets,’” The Globe and Mail reported in 2017.
At the annual general meeting in June 2017, PointNorth Capital’s proxy fight was successful. As a result, it appointed six of eight board members.
In May 2018, it became Alcanna. One of the director appointees was former Aurora Cannabis (NASDAQ:ACB) CEO, Terry Booth.
However, suppose you go back a decade. In that case, you will see that Alcanna and its predecessor have generated cumulative operating profits of 88.2 million CAD and revenue of 6.7 billion CAD for an operating margin of 1.3%.
Alcanna’s 10-Year Financial History
| Year | Operating Profit/Loss | Revenues | Year | Operating Profit/Loss | Revenues |
| 2020 | 22.6 million | 680.3 million | 2015 | 36.9 million | 746.4 million |
| 2019 | -30.5 million | 582.5 million | 2014 | 36.5 million | 694.2 million |
| 2018 | -165.0 million | 658.9 million | 2013 | 43.2 million | 661.0 million |
| 2017 | 12.5 million | 637.7 million | 2012 | 45.7 million | 630.1 million |
| 2016 | 40.4 million | 817.7 million | 2011 | 45.9 million | 591.5 million |
(all figures Canadian dollars)
It’s important to note that the significant operating loss in 2018 was from the company writing down the value of its Canadian operations’ assets based on lower sales. If you take out 2018, the operating margin rises to 4.2%, also an anemic margin.
But that’s the nature of the liquor business. It’s all about volume.
So, before you start counting your chickens, you might want to consider what Sundial has bought: Time.
The Bottom Line
The period between now and June 2022 will be critical for SNDL stock. The stock could skyrocket if the company can pull together a coordinated strategy and plan that investors buy into.
However, it remains to be seen whether it can pull this plan together. Right now, it’s got an assortment of assets that don’t tell a compelling story.
That’s why it trades around 65 cents.
If you’re tolerant of risk and you’re patient, SNDL could deliver big returns down the road. If you’re neither of these, you ought to stay away.
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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.
