Canada-based medical and adult-use cannabis producer SNDL Inc. (SNDL) has been struggling to grow and make profits. While SNDL has made several acquisitions to support its growth, in this piece, I will discuss why the stock is still not worth buying now.
The company’s acquisition of Alcanna Inc. (CLIQ) last year helped it become a major private-sector liquor retailer in Canada. In addition, the company began this year by acquiring a cannabis extraction company, The Valens Company Inc. (VLNS), which is expected to bolster its position in the Canadian cannabis market.
SNDL witnessed solid sales growth in its last reported quarter. “Our regulated products platform has shown resiliency in the face of stiff industry and macroeconomic headwinds, and our vertically integrated cannabis business is in the early stages of providing the scale and results that we believe are required for SNDL to be a strong member of a future oligopoly in Canada,” said Zach George, Chief Executive Officer of SNDL.
However, this growth failed to create value for its shareholders. Its bottom line declined into negative territory as the company could not initiate effective cost-cutting measures. A lack of profitability remains a big concern for investors, and SNDL might take a while before it returns to profitability again.
While the marijuana industry shows promise for the long term, it is expected to witness restricted growth in the near term due to limited legality and regulations. Although many states and territories have legalized marijuana for recreational and medical use, cannabis remains illegal on a federal level.
Moreover, rampant inflation in recent months and interest rate hikes are increasing costs and have made it more difficult for companies to secure capital. On the other hand, the possibility of a recession might dampen consumer expenditure on discretionary goods like cannabis products.
SNDL shares have declined 67.2% over the past year and 23.9% year-to-date to close the last trading session at $1.59. The stock is trading below its 50-day and 200-day moving averages of $2.06 and $2.56, respectively. Given the macroeconomic challenges, the stock might remain under pressure.
Here is what could shape SNDL’s performance in the near term:
Bottom Line in the Red
For the fiscal third quarter ended September 2022, net revenue increased substantially to C$230.50 million ($167.70 million). However, its loss from operations came in at C$88.54 million ($64.42 million), up 365% from the year-ago value.
Net loss came in at C$98.84 million ($71.91 million) compared to a net income of C$16.71 million ($12.16 million) in the year-ago period.
The net loss was largely due to higher general and administrative expenses, depreciation and amortization, asset impairment of intangibles and goodwill, finance costs, and a change in the fair value of derivative warrants. General and administrative expenses for the quarter were C$44.80 million ($32.59 million).
Also, its loss per share was C$0.41, compared to an EPS of C$0.08 in the previous year’s quarter. The company’s cash and cash equivalents decreased 53.7% year-over-year to C$291.43 million ($212.03 million).
Low Profitability
SNDL’s trailing-12-month gross profit margin of 19.07% is 65.7% lower than the industry average of 55.67%. Its trailing-12-month net income and levered FCF margins of negative 54.54% and 23.71% compare with the industry averages of negative 5.99% and 4.01%, respectively. Moreover, its trailing-12-month ROCE, ROTC, and ROTA stand negative at 19.18%, 2.07%, and 14.84%.
Unfavorable POWR Ratings
SNDL’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SNDL has a D grade for Quality, in sync with its negative profit margins.
It has an F grade for Stability, consistent with its beta of 3.79.
SNDL is ranked #130 out of 166 stocks in the D-rated Medical - Pharmaceuticals industry.
Click here to see the other ratings of SNDL for Growth, Value, Sentiment, and Momentum.
View all top stocks in the Medical – Pharmaceuticals industry here.
Bottom Line
The stock has plunged substantially in the past months, and SNDL might fall further as the company’s losses and weak profit margins weigh on investors’ sentiments. Although marijuana legalization has been rising, especially for medical purposes, full-scale federal legalization is nowhere near.
While the company’s acquisitions should help create some opportunities, its prospects for profitability remain uncertain. So, I believe this risky stock is better to steer clear of.
How Does SNDL Inc. (SNDL) Stack up Against Its Peers?
While SNDL has an overall POWR Rating of D, one might consider looking at its industry peers, Bristol-Myers Squibb Co. (BMY), Novartis AG (NVS), and Johnson & Johnson (JNJ), which have an overall A (Strong Buy) rating.
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SNDL shares were trading at $1.54 per share on Friday morning, down $0.05 (-3.15%). Year-to-date, SNDL has declined -26.32%, versus a 2.90% rise in the benchmark S&P 500 index 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 knowledge of equity research and portfolio management at Finlatics.
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