Canadian cannabis producer SNDL (SNDL) has made several acquisitions to support its growth. Although the company witnessed solid revenue growth in its last reported quarter, its profitability was in the red. The company’s return to profitability remains uncertain. Also, given the regulatory challenges, I think this fundamentally weak stock is best avoided right now. Read….
SNDL Inc., a Canadian-based adult and medical marijuana producer (SNDL) has struggled to grow and make profits. While SNDL has made several acquisitions to support its growth, in this article I will discuss why it still isn’t worth buying the shares now.
The acquisition of Alcanna Inc. (CLIQ) by the company last year helped it become a leading private sector beverage retailer in Canada. Additionally, the company started this year by acquiring a cannabis extraction company, The Valens Company Inc. (VLNS), which is expected to reinforce its position in the Canadian cannabis market.
SNDL witnessed solid sales growth in its last reported quarter. “Our regulated product platform has shown resilience in the face of tough industry and macroeconomic headwinds, and our vertically integrated cannabis business is in the early stages of delivering the scale and results we believe are needed for the SNDL to be a strong member of a future. oligopoly in Canada,” said Zach George, CEO of SNDL.
However, this growth has not been able to create value for its shareholders. Its bottom line fell into negative territory as the company was unable to initiate effective cost-cutting measures. The lack of profitability remains a major concern for investors, and the SNDL may take a while before returning to profitability again.
While the marijuana industry is promising in the long term, it is expected to witness limited growth in the short term due to limited legality and regulations. Although many states and territories have legalized marijuana for both recreational and medical use, marijuana remains illegal at the federal level.
In addition, rampant inflation in recent months and rising interest rates are increasing costs and making it difficult for companies to raise capital. Conversely, the possibility of a recession could dampen consumer spending on discretionary goods such as cannabis products.
Shares in SNDL are down 67.2% over the past year and 23.9% year-to-date, ending the last trading session at $1.59. The stock is trading below the 50- and 200-day moving averages of $2.06 and $2.56, respectively. Given the macroeconomic challenges, the stock may remain under pressure.
Here’s what might shape SNDL performance in the short term:
bottom row in red
For the third fiscal quarter ended September 2022, net income increased substantially to C$230.50 million (US$167.70 million). However, its operating loss amounted to C$88.54 million (US$64.42 million), a 365% increase over the prior year figure.
The net loss was C$98.84 million (US$71.91 million), compared to a net profit of C$16.71 million (US$12.16 million) in the prior year period.
The net loss was largely due to higher general and administrative expenses, depreciation and amortization, impairment of intangible assets and goodwill, finance costs and a change in the fair value of derivative collateral. General and administrative expenses for the quarter were C$44.80 million ($32.59 million).
In addition, its loss per share was C$0.41, compared to an earnings per share of C$0.08 in the year-ago quarter. The company’s cash and cash equivalents decreased 53.7% year-over-year to C$291.43 million (US$212.03 million).
Low Profitability
SNDL’s trailing-12 months gross profit margin of 19.07% is 65.7% lower than the industry average of 55.67%. Its 12-month net income and leveraged FCF margins of minus 54.54% and minus 23.71% compare to industry averages of minus 5.99% and minus 4.01%, respectively. Furthermore, its ROCE, ROTC and ROTA from 12 months ago remain negative at 19.18%, 2.07% and 14.84%.
Unfavorable POWR Ratings
The dark foundations of the SNDL are reflected in its POWR Ratings. The stock has an overall rating of D, which is equivalent to a sale under our proprietary rating system. POWR ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also rates each stock against eight distinct categories. SNDL scores a D for Quality, in line with its negative profit margins.
It has an F grade for Stability, consistent with its beta of 3.79.
SNDL is ranked 130th out of 166 stocks in the D rating Doctor – Pharmacist industry.
Click here to see the other SNDL rankings for Growth, Value, Sentiment and Momentum.
View all major medical-pharmaceutical industry stocks here.
Conclusion
The stock has plummeted substantially in recent months, and the SNDL could drop further as the company’s losses and weak profit margins weigh on investor sentiment. While marijuana legalization is on the rise, especially for medical purposes, full-scale federal legalization is far from happening.
While the company’s acquisitions should help create some opportunities, its profitability prospects remain uncertain. Therefore, I believe that this risky stock is best avoided.
as SNDL Inc. (SNDL) compare to its peers?
While the SNDL has an overall POWR rating of D, one might consider looking to their industry peers, Bristol-Myers Squibb Co. (BMY), Novartis AG (NVS) and Johnson & Johnson (JNJ), which have an overall rating of A (Strong Buy).
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SNDL shares were trading at $1.54 a share on Friday morning, down $0.05 (-3.15%). Year-to-date, the SNDL is down -26.32%, versus a 2.90% rise for the benchmark S&P 500 during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a master’s degree in economics, she gained expertise in equity research and portfolio management at Finlatics.
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