SNDL (NASDAQ: SNDL) looks like it's on the road to being a leading cannabis stock. Between making a lot of operational improvements and buying up a lot of local competitors, the company's cannabis segment in Canada is getting stronger and stronger, right when its alcohol business is picking up, too.
And that's why it's in the running for the title of being the best cannabis stock this year, and it has a shot at winning next year as well. Here's what's driving the company's ascent and three reasons to be optimistic about its future.
1. It has plenty of cash on hand, and a history of putting it to good use
As of its second-quarter earnings report on Aug. 1, SNDL had 783.6 million Canadian dollars of cash, cash equivalents, and investments. That's a whopping amount compared to major competitors like Tilray Brands, which is a much larger business by market capitalization. Critically, the company has a good track record for utilizing its cash for strategic gain.
Take its acquisition in 2022 of Alcanna, Canada's largest private liquor retailer. That purchase cost SNDL a total of CA$320 million in cash and shares. But, as of Q2, the alcohol segment brought in CA$35.7 million in gross profit out of the company's total gross profits of CA$58.1 million for the quarter.
In other words, SNDL took its cash and converted it into a stream of profits that isn't going to peter out anytime soon. The Alcanna acquisition is just one of many, most of which focus on buying up cannabis businesses in Canada. And, via its SunStream Bancorp segment, SNDL now uses its cash pile to generate low-cost profits in the form of interest payments. It also has recently exercised opportunities to convert its loans into equity stakes too, soon to include players in lucrative markets like the U.S.
None of its competitors can claim to be as aggressive or as effective with their big-ticket investments, and that's a major point in SNDL's favor.
2. It will soon start to generate cash instead of just burning it
As wise investors know, while it can sometimes be sufficient to make returns by carefully managing a hoard of cash, it's usually a much more attractive proposition for shareholders when a company can bring in cash from its operations. SNDL isn't there quite yet, but there's reason to believe that it will be within a few quarters. Here's why.
SNDL just started an efficiency drive that management expects will recoup CA$20 million in annual cost savings. While the initiative will cost CA$11.8 million, it should leave the company in a much better position once it is all wrapped up over the next 18 months. As of Q2, its net losses from operations were just shy of CA$5 million. That means there is a very high probability SNDL will start to report free cash flow (FCF) consistently for the first time quite soon.
Producing cash will enable it to be even more aggressive with its acquisitions, as well as with any organic growth initiatives it wishes to pursue, like its efforts to open more stores in British Columbia. There is now a future in which it's possible to imagine the company even paying a dividend although it won't be anytime soon.
The other key takeaway here is that it will become cash-flow-positive during a time when the Canadian market for marijuana products is anything but vibrant, and during a time when even liquor sales are slumped somewhat despite the summertime party season. And if SNDL can follow through on generating free cash flow nonetheless, it'll be yet another big vote in its favor.
3. Management has good instincts
When taking the above two points into consideration, it's hard to avoid the conclusion that SNDL's management team knows what it's doing.
Its transition from cannabis company to the conglomerate that it is today was not guaranteed. Nor was maintaining a respectable amount of its cash reserves while pivoting into a new line of business (alcohol) and struggling with unprofitability in what was formerly its main segment (cannabis). These successes aren't random.
At the head of the team is CEO Zach George, who has been in his current position since early 2020. Notably, George has a seat on the board of directors, but he isn't chairman of the board as is commonly the case. This distinction may imply a higher level of leadership oversight by other board members, which could be a contributing factor toward SNDL's effective governance as well.
Regardless, shareholders should recognize that a strong management team with a proven track record is an asset that's hard to find in the cannabis industry, and that's a reason to consider buying SNDL.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends SNDL and Tilray Brands. The Motley Fool has a disclosure policy.
