SNDL(NASDAQ: SNDL), formerly known as Sundial Growers, is shaping up to be a decent purchase for value-sensitive investors. Between the improving efficiency of its operations, its burgeoning investment income, and its ongoing attempt to invest in businesses competing in the U.S. marijuana markets, shareholders have no shortage of favorable trends and catalysts to appreciate.
And things could be getting even better over the next few quarters. Here's what you need to know.
The conditions are ripe to reap major returns from investments in the U.S.
The story of SNDL over the last couple of years is one of diversification.
Once a Canada-only marijuana cultivation and sales business, the SNDL of today is also the country's largest private liquor retailer, and its SunStream Bancorp division is a major investment banking organization in the North American cannabis industry. Its investments only delivered a scant 13 million Canadian dollars in operating income in the first quarter, but it's actually the company's most profitable segment, at least for now. Though it brought in CA$116 million from liquor sales, and more than CA$71 million in cannabis sales, only booze was profitable, with a bit more than CA$2 million in operating income.
There may well be a lot more profit on the way from its investing activities. SunStream Bancorp buys the debt of marijuana businesses in the U.S. and Canada, and, in some cases, invests in them directly to secure a share of their equity. Its portfolio is worth roughly CA$560 million, and, so long as its debtors are good for the cash, it'll enjoy a stream of interest income for the foreseeable future.
If cannabis legalization or descheduling policies proceed in the U.S., SunStream is already positioned to flourish by writing loans to the industry's aspiring new entrants. But even if that doesn't happen, American marijuana players will still be fairly starved for capital to grow within the state-level markets that they compete in right now, absent any banking reforms.
So all SunStream needs to do to secure low-cost income is to underwrite its loans and pick its investments with care. Therefore, unless the North American marijuana industry somehow repeats its (temporary) collapse in late 2021, SNDL has a clear path to becoming more and more profitable even if it doesn't pursue any further improvements to its operational efficiency.
And that could easily drive the stock higher and higher.
This stock is priced at a steal right now
Another key driver of SNDL's stock performance throughout the rest of 2024 could well be its dirt cheap valuation.
Presently the company's price-to-book (P/B) multiple is 0.6, and its price-to-sales (P/S) ratio is just 0.8. In a nutshell, its P/B under 1 indicates that the price of the stock does not fully take into account the underlying value of its assets. Likewise, its P/S beneath 1 suggests that the market is not fully taking its revenue into account.
Both metrics point to the idea of SNDL being a prime opportunity for value investors, especially for those pursuing deep value strategies.
The market will likely eventually recognize the disparity between SNDL's financial performance and its stock price. One possible catalyst for that would be if it maintains three or four consecutive quarters of operating profits, a situation it hasn't been in since 2022. Another catalyst would be legalization of cannabis in the U.S., and it's also possible that rescheduling policies going into effect could do the trick as well.
Overall, SNDL is worth watching, now that its long period of finding its footing appears to be drawing to a close. It's still on the riskier side, as it's only intermittently profitable so far. But with its valuation so low, and its most profitable segment primed to experience an influx of demand, there's currently a solid margin of safety for an investment from those who would normally prefer something a bit more conservative.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy.
