Shares of Sundial Growers have rebounded amida broader cannabis rally. But an analyst at BMO Capital Markets has concerns about its valuation.
BMO Capital Markets analyst Tamy Chen lowered her rating on Sundial shares (ticker: SNDL) to Underperform from Market Perform. She raised her price target to 40 cents from 30 cents.
Sundial stock, which once traded north of $11, tanked in 2019 and 2020 following a number of issues, including some of its cannabis being rejected by a customer due to poor quality,MarketWatch reported. The issues culminated with the company’s core management team resigning last year. The new management team, Chen notes, has drastically improved the company’s balance sheet. The stock has soared 177% in 2021, up 44% from its levels 12 months ago.
But in terms of its sales growth, positioning in the Canadian recreational market, and path to profitability, the company’s fundamentals don’t support Sundial’s valuation, according to Chen. Despite the stock trading at 28 times her calendar-year 2022 sales forecast, she notes that recreational sales declined 30% in the third quarter of 2020 from the second quarter—even though there was growth in the broader industry.
“SNDL needs to demonstrate more consistent top-line momentum to ease concerns that there is soft consumer traction for its products,” Chen wrote.
The Sundial downgrade was a part of a broader new framework Chen is applying to her cannabis stock coverage. She is homing in on firms with improving profitability and key strategic attributes. Such attributes include a large and capable strategic partner, a meaningful presence in key international markets like Germany, a strong management team, and a clear and strategic path into the U.S. cannabis market.
She also lowered her rating on OrganiGram Holdings (OGI) to Underperform from Market Perform, noting the company, “has not been able to materially grow its rec sales for several quarters even though the industry has expanded.”
Sundial stock was down 5.8% to $1.31 on Wednesday. ETFMG Alternative Harvest (MJ), an exchange-traded fund with exposure to the cannabis business, was down 0.8%.