S.N.D.L (NASDAQ:SNDL), formerly known as Sundial Growers, is shaping up to be a good buy for value-sensitive investors. Between the increasing efficiency of its operations, its growing investment income, and its continued efforts to invest in companies competing in the U.S. marijuana markets, shareholders have no shortage of favorable trends and catalysts to appreciate.
And things could get even better in the coming quarters. Here’s what you need to know.
Conditions are ripe for big returns from investing in the US
SNDL’s story in recent years has been one of diversification.
Once a marijuana cultivation and sales company that operated only in Canada, today’s SNDL is also the country’s largest privately held liquor retailer, and its SunStream Bancorp division is a major investment banking organization in the North American cannabis industry. The investments only generated a paltry C$13 million in operating revenue in the first quarter, but it’s actually the company’s most profitable segment, at least for now. Although it generated CA$116 million from liquor sales, and more than CA$71 million from cannabis sales, only liquor was profitable, with just over CA$2 million in operating income.
There may be much more profit in the investment activities. SunStream Bancorp buys the debt of marijuana companies in the US and Canada, in some cases investing directly in them to secure some of their equity. The portfolio is worth roughly CA$560 million, and as long as its debtors are good for the money, it should enjoy a stream of interest income for the foreseeable future.
If cannabis legalization or defunding takes hold in the US, SunStream is already positioned to prosper by providing loans to the industry’s aspiring newcomers. But even if that doesn’t happen, U.S. marijuana players will still have quite an appetite for capital growth in the state-level markets in which they now compete absent any banking reforms.
So all SunStream needs to do to secure cheap revenue is underwrite the loans and choose the investments carefully. Unless the North American marijuana industry somehow repeats its (temporary) collapse in late 2021, SNDL therefore has a clear path to becoming increasingly profitable, even if it does not pursue further improvements to its operating efficiency.
And that could easily drive the stock higher and higher.
This stock is currently a bargain
Another key driver of SNDL’s stock performance through the remainder of 2024 could be its dirt-cheap valuation.
Currently, the company’s price-to-book ratio (P/B) is 0.6, and its price-to-sales ratio (P/S) is just 0.8. In short, the P/B below 1 indicates that the stock’s price does not fully reflect the underlying value of its assets. Likewise, the price-to-earnings ratio below 1 suggests the market is not fully considering its earnings.
Both metrics indicate that SNDL is an excellent opportunity for value investors, especially those pursuing deep value strategies.
The market will likely eventually recognize the difference between SNDL’s financial performance and its share price. A possible catalyst for this would be if the country maintains three or four consecutive quarters of corporate profits, a situation it has not been in since 2022. Another catalyst would be the legalization of cannabis in the US, and it is also possible that rescheduling the policy effect could also work.
Overall, SNDL is worth checking out as the long period of finding a permanent home seems to be coming to an end. It is still on the riskier side as it is only occasionally profitable so far. But with the valuation so low and the most profitable segment primed to experience an influx of demand, there is currently a solid margin of safety for an investment from those who would normally prefer something 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.
Here’s How SNDL Stock Could Fly Through the Rest of 2024 and Beyond, originally published by The Motley Fool
