Canaccord Dials Down Its Price Target on Sundial Growers Post-Earnings

In the two trading days since Sundial Growers (SNDL) reported its full-year fiscal 2021 earnings, shares of the Canadian cannabis company have wilted about 10%. And if you’re guessing that means that Sundial’s report wasn’t great — you might be right.

For fiscal 2021, this supposed “growth company,” selling a popular product into a market that’s becoming more and more legal to market to, actually saw its revenues decline 8% year-over-year, to just C$56.1 million. And net losses for the year were C$230 million — 11% more than last year — despite the fact that Sundial boasted of a “record adjusted EBITDA” profit from continuing operations of C$32.1 million for the full year 2021.

Despite this bad news, Sundial CEO Zach George claimed that 2021 “was a transformational year for Sundial,” in which gross margins improved, the balance sheet strengthened, (the aforementioned) adjusted EBITDA turned positive, and Sundial began “to see positive momentum across all of our key operating segments.” To top it all off, George even vowed that, by the end of this year, Sundial will become “free cash flow positive” for the first time in its history as a publicly traded company.

So why is Sundial stock down?

In a note that came out Friday, Canaccord analyst Shaan Mir tried to explain: On the one hand, Sundial beat analyst expectations with its full year sales of C$56.1 million, and beat Canaccord’s estimates for both sales and earnings in Q4 in particular. For the quarter, Sundial reported sales of C$22.7 million, up 58% sequentially, and 13.5% ahead of Mir’s predicted $20 million.

However, sales mostly surged because this was the first quarter in which Sundial included “contributions for the SpiritLeaf retail chain, which generated ~C$10M in franchise and retail revenues,” noted the analyst — so for the most part, this was not organic growth.

Also worth noting: CEO George said one reason Sundial improved its gross profit margin in the quarter was because of a “more favorable sales mix of higher-margin products.” However, Mir notes that this came at the cost of Sundial “index[ing] away from value/discount segment,” and this may come at a cost to market share.

In general, the analyst criticized Sundial’s “lagged performance in the core cannabis business (relative to larger cap peers).” In further evidence of which, Mir points out that fully C$18.8M of Sundial’s profits in the quarter, and the year, came in the form of “investment income” rather than sales of marijuana, which income was tied to Sundial’s C$72.4M investment into the SunStream JV.

Mir appears to view these investments as a potential liability for Sundial, however, in light of “a more challenging credit-investment environment.” And given that the core cannabis business continues to struggle, he ultimately concludes that despite the sales beat, Sundial’s target price deserves to be rolled back a bit — from US$0.80 per share before earnings, to now just US$0.60.

Granted, that does seem to imply that Sundial stock is undervalued, and could rise as much as 28% from its current price of $0.47 per share. Regardless, Mir declines to endorse Sundial stock, and maintains a “hold” rating on the shares. (To watch Mir’s track record, click here)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.