Sundial Growers (NASDAQ:SNDL) is a small cannabis company that has had a rough few years. Its initial run as a cannabis production company failed to produce much value. In fact, Sundial piled up large losses as it struggled to adapt to an oversupplied Canadian marijuana market. Sundial managed to raise capital during the meme stock moment in early 2021, however, and was able to turn the company around. Now, Sundial has adopted a far more diversified approach, as it has made major investments in cannabis and alcohol retailing. Additionally, it provides loans and financing services to other marijuana companies. Yet, while operations are improving, SNDL stock hasn’t turned around — at least not yet.
Last week, Sundial announced earnings and they were a solid improvement. The company’s top-line revenues for the fourth quarter grew 63% year-over-year. The company’s gross margin rose to nearly breakeven after running a huge loss in 2020. This is in part thanks to the company starting to earn profits on its retail store business after completing the acquisition of Inner Spirit Holdings earlier in 2021. The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged to 18 million CAD for the fourth quarter alone and to more than 32 million CAD for the full year.
With this upbeat quarter, Sundial has now generated positive EBITDA for two quarters in a row. That may not sound like a big deal, but it’s a surprisingly difficult accomplishment to reach within the brutally competitive cannabis space. On top of that, Sundial’s chief executive officer stated that the company intends to become free cash flow positive by the end of 2022. This is exactly what you want to see. Sundial still has cash to work with on its balance sheet and it is already getting the business to profitability fairly quickly since the business model pivot in early 2021. It wasn’t an instantaneous turnaround and judging by the price chart, the short-term traders have clearly given up on SNDL stock. But, when you look at the fundamentals, the plan is working. So, is Sundial a good buy now?
There’s a pretty simple way to think about valuation for SNDL stock at this time. As of year-end 2021, Sundial had 1.1 billion CAD ($860 million) of cash, marketable securities, and long-term investments on its balance sheet. And, as of this writing, the firm has a market capitalization of just over $1.1 billion. This means investors are paying a roughly $250 million premium to the company’s tangible assets in order to bet on Sundial’s future prospects. So, Sundial stock isn’t outright cheap based just on net asset value. However, given the improving trajectory of Sundial’s results, the valuation seems reasonable for investors looking for a turnaround in the cannabis space.
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On the date of publication, Ian Bezek 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.
