ACB vs. SNDL: Which Cannabis Stock Is a Better Buy?
May 26 2021 - 7:38AM
Finscreener.org
Ever since Canada legalized pot for recreational use in late
2018, Canadian cannabis stocks have grossly underperformed their
counterparts in the U.S. Cannabis is a highly regulated industry
which meant the rollout of retail store licenses was slower than
expected in major Canadian provinces. This in turn led to
oversupply issues that impacted inventory levels and profit margins
of cannabis producers. Further, the top-line of companies has been
hurt by a thriving black market as well as rising competition in
this nascent industry.
While Canadian companies are grappling with multiple structural
issues, the rapidly expanding cannabis market continues to attract
investors. In case, marijuana is legalized at the federal level in
the U.S., investors can expect pot stocks to soar and touch record
highs.
Keeping these factors in mind, we look at two beaten-down
Canadian pot stocks- Aurora Cannabis (NYSE: ACB)
and Sundial Growers (NASDAQ: SNDL)
to see which is a better bet right now.
Aurora Cannabis stock is down 95% from record
highs
One of the worst-performing stocks on the TSX in the last two
years is Aurora Cannabis. In fact, ACB stock is currently trading
at $7.19 which is 95% below its all-time highs. ACB stock went on
an acquisition spree just after Canada legalized marijuana and it
bought companies at a hefty premium.
In the fiscal fourth quarter of 2020 that ended in June, Aurora
Cannabis reported
a goodwill impairment charge of CA$1.6 billion. Goodwill is
basically the difference between the acquisition price and the book
value of a company. So, in case a company with a book value of $100
million gets acquired for $120 million, the acquiring company will
have $20 million as goodwill on its balance sheet.
It means a goodwill impairment charge occurs when a company pays
a premium to acquire assets of another company and the value of
these assets deteriorates over time bringing the value of goodwill
lower.
Goodwill impairment is a non-cash charge but Aurora’s staggering
write-down does raise a few questions over the decision-making
ability of the company’s leadership team.
ACB has also diluted shareholder value at an alarming rate.
Between June 2014 and March 2021, the company has increased its
outstanding share count from 1.3 million to 198 million, raising
capital via multiple equity issuances.
In the last few quarters, Aurora Cannabis has looked to improve
its profit margins by lowering production capacity, shifting its
product mix, and reducing its workforce. ACB also sold off certain
assets and had first promised investors it would turn profitable on
an adjusted basis in the September quarter of 2020. However, in the
March quarter, Aurora Cannabis disappointed investors yet again and
reported
an adjusted EBITDA loss of $24 million.
Sundial Growers is valued at a market cap of $1.36
billion
Sundial Growers went public less than two years back. The
company sold 11 million shares priced at $13 per share in the IPO,
raising $143 million in the process. Currently SNDL stock is
trading at a paltry $0.7263 per share.
Similar to Aurora Cannabis, Sundial has also burnt cash due to
negative profit margins. Between September 2020 and February 2021,
SNDL
issued 1.15 billion shares in order to boost liquidity.
In Q1 Sundial reported a negative gross margin of CA$3.45
million. Its gross margins were negative even if we exclude
adjustments for fair value and impairments.
Sundial however confirmed it is reducing its product line and
liquidating low-margin items to reduce losses. While its net loss
was a hurtful CA$134.4 million, SNDL reported an adjusted EBITDA
profit of CA$3.3 million. The company reduced its operating
expenses by 35% year over year as well in Q1.
The final takeaway
We can see SNDL and ACB have a lot of unanswered questions right
now. While the two companies are part of fast-growing markets, the
top-line growth has been lackluster in the last few quarters.
Further, their losses might narrow going ahead due to cost
initiatives rather than operating leverage.
Aurora Cannabis and Sundial Growers need to deliver on their
promises, execute on management goals and report better than
expected numbers to regain investor confidence.
Aurora Cannabis (NASDAQ:ACB)
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