Did This Stock’s Management Just Drop a Bombshell?

Generally speaking, big news comes out when a company releases its earnings report. Investors may not expect there to be significant information contained within a regular press release, especially one that merely announces the closing of a transaction that investors have been aware of for some time.

But that’s where Sundial Growers ( SNDL 4.18% ) recently dropped some insightful information for its shareholders. And it could have significant ramifications for investors, potentially altering their outlook for the business.

Person standing in a greenhouse.

Image source: Getty Images.

Sundial hints at spinoffs and consolidation

When Sundial announced that it was acquiring alcohol retailer Alcanna, it was a move that seemed a bit out of the blue. After all, Sundial is in the cannabis business, and diversifying into a whole other area didn’t appear to make much sense.

However, upon learning that Alcanna has a majority stake in Nova Cannabis, which has more than 60 retail pot shops across Canada, the deal started to seem more in line with Sundial’s strategy. It closed on an acquisition of Inner Spirit Holdings in May 2021 — a business that, at the time, had more than 80 pot shops and was working on expanding to more than 100.

Expanding into more retail-cannabis locations would be consistent with Sundial’s acquisition of Inner Spirit. Alcohol, however, isn’t in line with the company’s current strategy. While other cannabis companies have pursued partnerships with alcohol companies in an effort to bring cannabis-based beverages to market, Sundial has been quiet on that front.

But in a press release that the company put out on March 31 announcing the completion of the Alcanna deal, it made more sense again when CEO Zach George stated the following: “While the Alcanna transaction initially appears to be a step toward diversification and vertical integration, we expect to bring focus and specialization to the model as the cannabis industry evolves, including, for example, through potential spinoffs and consolidation of synergistic assets into pure-play businesses.”

Sundial’s management essentially distances themselves from diversification, suggesting that isn’t its end goal. That could mean multiple possibilities, including spinoffs, which George specifically mentions as an option. In addition to owning pot shops, Sundial is a licensed producer and even an investor in other cannabis companies through its joint venture with private-equity firm SunStream Bancorp.

Would a spinoff be good for the business?

Spinning off businesses into separate entities can be an effective way for a company to focus on core competencies and simplify its overall strategy. Plus, it can help keep costs down. The downside is that that the remaining business would be smaller, less diverse, and potentially more volatile.

With Sundial’s quarterly revenue typically at less than 15 million Canadian dollars (prior to these acquisitions) and showing minimal growth, the company needs all the help it can get. It’s already well behind the bigger cannabis companies in the industry.

There are both positives and negatives to spinoffs, but I see more value in a focused, concentrated approach, as opposed to a company that has many different business units to manage. In Sundial’s case, I would consider it encouraging news that the company isn’t set on potentially keeping its current organizational structure, which has been growing in complexity over the past year through these acquisitions.

Investors should remain cautious

While management hinted at possible spinoffs, that doesn’t mean any are imminent. And given that pot stocks have been crashing over the past year (the Horizons Marijuana Life Sciences ETF is down more than 50% in 12 months), and growth stocks as a whole have been struggling in 2022, now may not be a time when Sundial would get top dollar for one of its businesses.

This latest news, although it’s insightful, doesn’t change anything yet. Investors who were hoping for a large, diversified company in Sundial may be disappointed, while those cringing at the business getting too broad may be relieved. Depending on where you fall on that spectrum, your long-term plans for Sundial may have changed.

If you haven’t invested in Sundial yet, you may be better off waiting to see how the business evolves as the growing number of moving parts involving the company make it difficult to assess how good of a buy it is right now. Given that uncertainty, there isn’t an overwhelming reason to invest in it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Source link

Leave a Reply

Your email address will not be published.