Indiva Limited (NDVAF)

[FUNMAN]

Will Sundial Growers' Wheeling and Dealing Pay Off?

Contributor
David Jagielski The Motley Fool
Published Jun 2, 2021 6:25AM EDT

https://www.nasdaq.com/articles/will-sundial-growers-wheeling-and-dealing-pay-off-2021-06-02

Sundial Growers (NASDAQ: SNDL) owes a lot to retail investors. If not for the stock's sudden and unexpected surge in value earlier this year, the company would not have been able to take advantage of its inflated share price when it decided to undergo not one, but two, offerings shortly afterward. Management's quick actions could pay off for the business in the long haul.

In recent months Sundial has been active on the M&A front, investing in other cannabis businesses. But are those moves good ones, and do they make the pot stock a more attractive buy today?

The company has been busy

The way that Sundial has been wheeling and dealing over the past few months, investors might think it's Black Friday on the markets. Here are all the deals the company has announced since February:

It made a strategic investment of 22 million Canadian dollars in Indiva, which makes edible cannabis products. In addition to buying shares of the company, Sundial will also provide Indiva with a term loan facility.

It created a joint venture, SunStream Bancorp, with SAF Group. The venture, which is split 50-50 between the two entities, will look at potential investment opportunities in the cannabis industry, both globally and within Canada, including possible SPACs. Sundial initially invested CA$100 million in March, and increased that to CA$188 million just a month later.

It acquired shares of Valens for just under CA$2 million. Together with its previous purchases, Sundial now owns more than 10% of the business. Valens is a cannabis extraction company that has generated CA$72 million in revenue over the trailing 12 months.

Its most recent acquisition was on May 5, when Sundial announced it would acquire all of the shares of cannabis retailer Inner Spirit in a cash-and-stock deal worth CA$131 million. Inner Spirit has 86 stores across Canada and plans to hit 100 as early as this summer. Last year the company reported CA$27 million in revenue.

Thankfully that number is just a fraction of Fire & Flower's revenues with fewer stores reporting. I have a position there too. Because of the F&F deal with Couche-Tard, Sundial probably couldn't squeeze in there. Just my opinion. - FUNMAN

That's a lot of activity in a short period. The cannabis producer is certainly diversifying its operations, while also making investments in other businesses. For a company that generated just CA$11.7 million in gross revenue in its first-quarter results for the period ending March 31 (for a year-over-year decline of 29%), these additional investments will give Sundial more opportunities to pad its struggling top line.

What I like in particular is its investment in Indiva, which could expand its product offerings. And its acquisition of Inner Spirit should complement its shift in strategy away from wholesale and toward branded sales. Sundial was strategic with its moves, and didn't blow all of its money on one big acquisition, leaving plenty of options on the table moving forward.

Sundial is still sitting on lots of cash

Although the company has been busy investing its money, investors shouldn't be surprised if it continues making more moves. Sundial reported that as of May 7, its unrestricted cash balance totaled CA$752.7 million. That's higher than the CA$719 million it reported on March 15, and more than 12 times the CA$60.4 million it had at the end of 2020.

What's great for investors is that the company isn't burning through all of its cash, so that money can provide stability for the business. In its most recent quarter, Sundial used up CA$34.4 million on its day-to-day operating activities. If it maintains that pace, its cash (assuming there are no other investments or acquisitions) should last for more than 21 quarters.

Should you invest in Sundial Growers?

There are many reasons Sundial looks like it may be a bad buy: The business isn't growing, it has incurred net losses of CA$330 million over the past four quarters, and it is spending most of its money on acquisitions rather than its core operations. But with a stockpile of cash and plenty of opportunities to grow its business through these new deals, none of those reasons should deter investors. I think Sundial is in the midst of a turnaround, and may look drastically different a year from now. And that's what likely has many investors excited about the pot stock, as it is expanding and making strategic moves that could put it in much better shape in the not-too-distant future.

However, I wouldn't invest in the company just yet -- I am curious what it will do with all these moving pieces and how well they fit into its overall strategy. While at first glance the business looks like it may be on the right path, it's far too early to tell right now. I'd definitely keep a close eye on Sundial, but I wouldn't pull the trigger and buy its stock just yet.




David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Valens GroWorks Corp. The Motley Fool recommends Valens GroWorks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.