Why SNDL Rallied Last Week

Shares of Canadian cannabis and liquor platform SNDL (SNDL -8.03%) rallied 14.6% last week, according to data from S&P Global Market Intelligence.

SNDL is coming off an earnings report that showed positive momentum in revenue and profitability, with its losses narrowing. Then last week came several positive news items regarding the cannabis industry in Canada and prospects for legalization in the U.S.

SNDL is diversified, but cannabis brings the upside potential

The Canada-based SNDL is a bit different from your traditional multistate operator in the U.S. After becoming a meme stock back in 2021, SNDL was able to raise a massive amount by tapping the equity markets when its price was elevated.

SNDL then redeployed that cash in several ways: buying a profitable liquor retail business, consolidating several smaller Canadian cannabis retailers and wholesalers, and investing in the debt securities of U.S. cannabis companies via its SunStream Bancorp joint venture. Therefore, Sundial is exposed to both the Canadian and U.S. cannabis industries, each of which saw positive news last  week.

On Wednesday, Canada’s most populous province, Ontario, disclosed its budget for the fiscal year, in which it expects $445 million in cannabis tax revenue this year, which would be an increase over the $432 million it hauled in last year. While that mere 3% growth may not seem like much, the Canadian cannabis industry has been beset by oversupply and demand destruction from higher interest rates. Therefore, to see any year-over-year growth for this beaten-down industry is a positive.

In addition, a couple of different cannabis-related polls were released last week in the U.S., with positive results for the industry. A Pew Research poll showed 88% of Americans believe in legalizing cannabis in at least a medical capacity, while 57% favored full legalization on a recreational basis, and only 11% said the drug should continue to be illegal. Then an American Bankers Association poll found that 63% of voters supported the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which is currently making its way through Congress. The SAFER Act would allow cannabis companies to access more banking services and not have to deal with as much cash as they do now. The passage of the bill would lower the industries’ costs of business and increase safety.

Hold your horses on federally legal weed, though

While there has been some positive talk in Congress recently about the passage of the SAFER Act or perhaps a rescheduling of cannabis, we’ve been here before. After all, many thought legalization was imminent after the current administration and Democratic Congress were voted into office back in late 2020. However, dealing with the pandemic, inflation, and foreign policy crises seemed to get in the way, making cannabis legislation a less important issue by comparison. Now, an election is coming up, making prospects of passage a long shot.

Moreover, despite some positive headlines, it wasn’t all great news last week. Three Republican Senators sent a letter to the DEA at the end of the week, cautioning against rescheduling cannabis from a Class I drug to a Class III drug, as the Department of Health and Human Services recently advised.

But even if legalization doesn’t happen in the near term, SNDL has been reporting growth and improving profitability, while its stock is cheap. In 2023, revenue grew 28% and gross profits expanded 36%, showing better margins. While adjusted operating income was still negative, SNDL’s operating losses narrowed by 44%.

Perhaps most importantly, SNDL has no debt, unlike many of its peers. In fact, it owns the debt of some of those other peers, and collects interest on those holdings today. And at a price-to-book value of just 0.64 today, investors are paying well below value for SNDL’s net assets, which are comprised mostly of cash and debt investments in other cannabis companies.

That means there’s some modicum of safety in SNDL one won’t find in many other players, making it an interesting lower-risk choice for exposure to this otherwise risky industry.


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