Sundial Growers isn’t a big name in the cannabis sector. However, the company has a variety of cannabis products, which earned it a name in the space. Sundial’s stock price had been hovering around $1 for a while. Monday’s global market sell-off due to the coronavirus scare and declining oil prices took down cannabis stocks as well. Sundial stock fell below $1, which puts it at risk of being delisted. Recently, the company had a core management shakeup. Will the new management save Sundial stock from getting delisted?
Why is Sundial stock in trouble?
Currently, the troublesome factor for Sundial is its stock price. The stock closed at $0.81 on Thursday. If a stock falls below $1, it could get delisted from the exchange. After a stock falls below $1, it has one month to get its share price back over $1 or it could face suspension and delisting. For a stock that just entered the exchange, getting delisted would be its worst nightmare. Sundial launched its IPO in August 2019. Since then, the stock has lost 84% of its value.
A core management team shakeup is never good for a company’s stock. The sudden departure of CEO Torsten Kuenzlen took a toll on Sundial’s stock price.
The company also announced other executive-level changes. Executive Chairman Ted Hellard and COO Brian Harriman also stepped down from their respective positions. At the same time, MedMen’s CEO departed amid the cash crunch. MedMen could be on the verge of bankruptcy. The company had to pay its suppliers using its stock.
The stock market doesn’t like surprises, especially leadership-level changes. Usually, the departure of any C-level employees makes investors skeptical about the company’s future. C-level employees or the leadership team are very important for any organization—they can make or break a company. As a result, any leadership change isn’t perceived as good news.
Many cannabis companies saw leadership changes in the last few months, which made investors skeptical. Sundial stock started the year trading at $3.01. Currently, the stock is hovering below $1. Hexo (TSE:HEXO) and Aurora Cannabis (NYSE:ACB) might also get delisted.
Focus on big cannabis players
I think that big players in the cannabis sector are slightly overrated. The strategic acquisitions with the alcohol and tobacco industry did draw investors’ attention to Aurora Cannabis, Cronos Group (NASDAQ:CRON), and Canopy Growth (TSE:WEED). Also, big companies have the financial capacity to survive a volatile industry like cannabis.
However, in a volatile industry, things can change very fast. Look at what happened with Aurora Cannabis. The company’s rising debt burden and bold decision to ramp up production put it in a severe financial crisis. Aurora Cannabis stock has also fallen below $1. As a result, the company might get delisted.
However, when we’re talking about an evolving industry like cannabis, I think that some light can be shed on smaller companies like Sundial Growers. Holding a market capitalization of $86.1 million, Sundial managed to grow its revenue. In the company’s third-quarter earnings, it beat analysts’ revenue estimates and reported revenue of $33.5 million. Sundial kept its debt lower. The company’s long-term debt was around 0.73 million Canadian dollars as of September 30, 2019.
Sundial focuses on giving the best to consumers
Sundial is smaller and new to the stock market compared to the more prominent players. However, the company has made a name in Canada and the United Kingdom. The success is mainly due to Sundial’s “Heal, Help, and Play” concept and its premium brands.
The company grew its organic revenue by 40% in its recent quarter. Sequentially, the net revenue also increased by 74% to $33.5 million in the third quarter. The company’s Canadian and UK businesses mainly contributed to the revenue growth. Sundial saw a 517% increase in its premium cannabis harvests from 1,896 kilograms in the first quarter of 2019 to around 11,700 kilograms in the third quarter. The company also sold 7,944 kilograms of cannabis in Canada, which shows stable demand for its products amid industry headwinds. I think that the company is doing a few things right. Sundial secured funding for its expansion plans in Canada and the UK.
Bad news lately
Sundial did report an EBITDA loss of $7.9 million. The losses were mainly related to the IPO and some acquisition and construction expenses. The company had its fair share of bad news. Sundial suffered two fires at its Olds facility, which destroyed a significant amount of cannabis. Some questions arose about the Olds facility’s condition. However, management said that Sundial complies with all of the standards and completes regular inspections.
In August 2019, one of Sundial Growers’ partners rejected some cannabis due to poor quality. However, in the IPO filing, Sundial said that it paid 3.3 million Canadian dollars in penalties related to the issue. The recent share of lousy news includes Sundial’s core management shakeup, which shocked its stock.
Some hope for Sundial Growers
Even though the stock is in trouble right now, I think that Sundial’s new management will be able to get its stock back to growth. The company’s cost management strategies will help in annualized cost savings of approximately 10 million-15 million Canadian dollars for fiscal 2020.
Notably, Sundial has been smart in refocusing its product lines and product formats to areas where there’s stronger demand. The company focused on cost management, which will help it survive the short-term dilemma. The company has time to prepare for long-term growth. Overall, Sundial’s recent progress looks stable. The company is optimistic about the future with its new management team. A fresh set of minds in the leadership team could help the company.
Sundial Growers, which provides premium cannabis with low debt levels and rising revenue, could bounce back. Many analysts are still hopeful that cannabis stocks could rebound by the fourth quarter of fiscal 2020.
Sundial rescheduled its fourth-quarter earnings to March 27 due to a delay in finalizing the negotiation of a financing transaction.
Sundial stock has fallen 73% year-to-date. The stock rose by 18.3% in February. So far in March, the stock has fallen 43% as of Thursday. Will the new management help the company and save the stock from getting delisted? We’ll have to wait and see.
What do I think?
Marijuana is an evolving industry. The world also is slowly valuing the importance of medical marijuana. Even Asian nations, which are known for their strict drug laws, are warming up to the benefits of medical marijuana. As I discussed earlier, investing in an evolving industry that requires patience. Growth can be slow in the marijuana industry, but the rising demand generates hope. If you can take on the additional risk and hope for your investment to bear fruit when the sector bounces back, the marijuana industry is for you. However, investors should be cautious and do research before making any investment decisions.
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