Canadian cannabis producer SNDL (SNDL) has made several acquisitions to support its growth. The company posted solid revenue growth in its last reported quarter, but was profitable. Whether the company will return to profitability remains uncertain. Plus, given the regulatory challenges, I think it’s best to avoid this fundamentally weak stock for now. read….
Canada-based medical and adult cannabis manufacturer SNDL Inc. (SNDL) is struggling to grow and be profitable. SNDL has made several acquisitions to support its growth, but this article explains why the stock isn’t worth buying now.
Last year’s acquisition of Alcanna Inc. (CLIQ) made the company Canada’s leading private liquor retailer. Additionally, the company began this year by acquiring cannabis extraction company The Valens Company Inc. (VLNS). This is expected to strengthen its position in the Canadian cannabis market.
SNDL posted strong sales growth in its last reported quarter. “Our regulated product platform has shown resilience in the face of challenging industry and macroeconomic headwinds, and a vertically integrated cannabis business is what we believe is necessary for SNDL to become a strong member of the future.” SNDL is in the early stages of delivering scale and results, said Zach George, CEO of SNDL.
However, this growth failed to create value for shareholders. Earnings plunged into negative territory as the company failed to initiate effective cost-cutting measures. Lack of profitability remains a major concern for investors and it may be some time before SNDL becomes profitable again.
The marijuana industry is promising in the long term, but limited legality and regulation are expected to limit growth in the short term. Many states and territories have legalized marijuana for recreational and medical purposes, but cannabis remains illegal at the federal level.
In addition, sharp inflation and rising interest rates in recent months have increased costs and made it more difficult for businesses to secure capital. On the other hand, a potential recession could dampen consumer spending on discretionary goods such as cannabis products.
SNDL’s share price is down 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 the 50-day and 200-day moving averages of $2.06 and $2.56 respectively. Given the macroeconomic challenges, stocks may continue to come under pressure.
Here’s what shapes SNDL performance in the short term:
bottom line of deficit
Net revenue increased significantly to C$230.5 million ($167.7 million) in the third quarter of the fiscal year ended September 2022. However, the operating loss was C$88.54 million ($64.42 million), a 365% increase from the previous year’s value.
Net loss was C$98.84 million ($71.91 million) compared to net income of C$16.71 million ($12.16 million) in the same period last year.
The net loss was primarily due to higher general and administrative expenses, depreciation, intangible and goodwill asset impairments, finance costs and changes in the fair value of derivative warrants. General and administrative expenses for the fourth quarter were $44.8 million ($32.59 million).
Loss per share was C$0.41, compared with EPS of C$0.08 in the year-ago quarter. The company’s cash and cash equivalents fell 53.7% year-on-year to $291.43 million ($212.03 million).
SNDL trailing 12 months gross margin of 19.07% is 65.7% lower than the industry average of 55.67%. Over the last 12 months, net income and leveraged FCF margins were -54.54% and -23.71%, respectively, compared to industry averages of -5.99% and -4.01%. Additionally, ROCE, ROTC, and ROTA over the past 12 months are negative at 19.18%, 2.07%, and 14.84%.
Unfavorable POWR Rating
SNDL’s dark fundamentals are reflected in it. POWR ratingThe stock has an overall D rating, equivalent to Sell on our proprietary rating system. The POWR Rating is calculated taking into account 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. SNDL has a D grade for quality in sync with negative profit margins.
Stability is F-grade, matching 3.79 in beta.
SNDL ranks 130th out of 166 stocks with a D rating. Medical – Pharmaceuticals industry.
click here To see other SNDL ratings for Growth, Value, Sentiment, and Momentum.
See all top stocks in the Healthcare-Pharmaceuticals industry here.
The stock price has fallen significantly over the past few months, and SNDL’s losses and low profit margins are weighing on investor sentiment, which could lead to further declines. Marijuana is being legalized, especially for medical purposes, but it is far from full federal legalization.
The company’s acquisition should help create some opportunities, but its profitability outlook remains uncertain. Therefore, I would advise avoiding this high-risk stock.
how SNDL Inc. (SNDL) up against peers?
SNDL has an overall POWR rating of D, but its peer Bristol-Myers Squibb Co. (BMY), Novartis AG (NVS), and Johnson & Johnson (JNJ), which has an overall A (strong buy) rating.
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Shares of SNDL were trading at $1.54 a share on Friday morning, down $0.05 (-3.15%). Year-to-date, the SNDL is down -26.32%, while the benchmark S&P 500 index is up 2.90% over the same period.
About the Author: Subhasree Kar
Subhasree developed a keen interest in financial instruments and pursued a career as an investment analyst. After completing her master’s degree in economics, she gained knowledge in equity research and portfolio management at Finlatics.
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