SNDL Rallies On News Of U.S. Rescheduling Of Cannabis

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SNDL Inc. rallied 22% as the DEA recommends rescheduling cannabis from Schedule I to Schedule III.The rally may lead to new valuations and price targets for cannabis companies.The rescheduling is a ...

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(NASDAQ:SNDL) rallied 22% today over news of the DEA supporting the rescheduling of cannabis in the US. The plant will begin a long journey now to become a part of Schedule III substances instead of Schedule I. The news is still being processed by investors and further actions must occur before it is rescheduled. The entire cannabis sector experienced a rally, including Canadian LPs (CGC, TLRY, VFF) and cannabis support stocks (MAPS, GRWG). This rally may lead to new valuations and price targets for cannabis companies. I recently covered SNDL and gave it a hold rating. The current rally will likely subside due to two reasons. The Fed rate decision comes out tomorrow, which will cause a lot of volatility and will likely squash any current rallies, even if the news is more of the same. The second reason is that the rescheduling has another period of waiting, although it is likely to occur at some point in the future. Federal legalization and the SAFER Banking Act are still unknowns in the equation. The current rally should still be active in the morning. Many investors are playing options on the rally, and they know that it comes as the highest risk. There is a chance today's rally begins a larger and longer rally. Beyond high-risk options plays, there is no reason to reload one's positions at the top of a rally. I rate SNDL as a hold for now and recommend one wait for this rally to fizzle. Canopy Growth (CGC) is up 78% today and Tilray (TLRY) up 39%. The stock prices are out of the stratosphere and caution is advised. Historical Announcement on the Rescheduling of Cannabis The US Congress first placed cannabis into Schedule I back in 1970 under Nixon. This move began a long-lasting, brutal and inhumane drug war against cannabis users. Today, 54 years later, an historical recommendation comes from the DEA to place cannabis into Schedule III. The announcement has been long-awaited by everybody, but the government must still enact the rescheduling. The victory for cannabis users and the cannabis industry will be short-lived until further legislation is passed, like the SAFER Banking Act, and until the government embraces federal legalization / decriminalization of cannabis. Meanwhile, multi-state operators (MSOS) and all THC active businesses will prepare for a different tax landscape for the cannabis markets. It will change the valuation of cannabis companies and pave the way for larger cannabis acceptance. The DEA proposal, which agreed with the US Department of Health and Human Services (HHS) recommendations for rescheduling, must still be reviewed by the White House Office of Management and Budget. Both agencies (DEA & HHS) are recommending the rescheduling of cannabis because, after a long review, they have found that it is less dangerous than other drugs and has sound/effective medical applications. This move does not legalize cannabis on a federal level, nor does it allow US cannabis companies to use banks. It does indicate a shift in mindset and policy with the US federal government and an increased likelihood of further cannabis policy reform. The review period will delay the rescheduling. It allows for a period of public comments and for an administrative judge to review it further. The proposal will be signed by the US attorney general. One must consider in the current rally that the announcement today marks the first step in rescheduling cannabis. The current rally will not likely continue, although cannabis stock prices may find new support and new price channels. The news is historical, but the market will need to fully digest the news and its implications. Canadian Cannabis LPs Stock Price Rally and Financial Performance My coverage concerns Canadian cannabis LPs and US cannabis support stocks, which trade on the US stock market. Other analysts on Seeking Alpha are covering MSOs. The legislative change will have (when it actually occurs) the most effect and advantage for the US operators. Traditionally, this tendency has not negated strong stock performance for the Canadian LPs. Many of these companies have firm plans for entry into US THC active cannabis markets; they also already operate in the US with different products like beer and CBD. SNDL, Village Farms (VFF), and Canopy Growth (CGC) have entry plans for US THC cannabis markets in place. The Canadian LPs are set to report earnings soon (May - June). Let's see where each company is at as of their last quarterly reports.   In CA$ Millions SNDL Q3-2023 CGC Q3-2024 VFF Q4-2023 Tilray Q3-2024               Revenue 248.5 78.5 98.3 255.6   Profit 57.3 28.2 18.7 70.1   Operating Costs 73.3 53.1 24.7 112.4   Net Income (82.8) (216.8) (29.8) (125.8)   Cash & St Investments 198.7 142.7 40.1 306.5               Estimated Next Quarterly Revenue 209.3 72.51 95.53 310.15               Book Value Per Share ($US) $3.48 $4.96 $2.74 $4.34   Current Price ($US) $2.45 $14.77 $1.58 $2.40               1-year performance 55.99% 12.37% 103.56% 2%   1-month performance 22.61% 80.84% (22.58%) (1.86%)               Click to enlarge Data from Seeking Alpha. Each Canadian LP receives revenues from non-THC cannabis sales, for instance alcohol and CBD products. SNDL and Tilray make revenue from alcohol and Village Farms and Canopy Growth from CBD sales. All of the companies operate with negative net income and little to no free-cash-flow. Each of them holds different strategies for entering US THC cannabis markets. Their current financial performance, like revenues, does not reflect US cannabis markets. Investors play these Canadian LPs based on the potential outcome of their US THC entrance and other business synergies. Because the transformation of the US cannabis markets has not fully occurred, one should focus on these companies' valuations and financial performance. SNDL, Village Farms, and Tilray trade under their book value per share and thus are undervalued. Canopy Growth, which is leading the rally, is far above its value range. Once the current rally cools off, then these companies are valued based on their financial performance. Future quarterly earnings are likely to be down for each company for different reasons. These reports will drop the companies' stock prices. The metrics point to a hold rating for each company (for some analyst at Seeking Alpha, a sell rating). The current rally is far outside of normal valuation. It is high risk to assume it will continue at this rate. Risk and Investment Strategy SNDL has a strong business strategy which produces a lot of revenue. Besides cannabis cultivation and product manufacture, the company operates a large number of alcohol and cannabis retail outlets. The company has been working on improving it margins while consolidating its growth operations. SNDL is already making investment revenue from its US THC cannabis holdings via SunStream Bancorp. The company holds non-voting shares in the US markets. The company is at low-risk of not fulfilling its current business plans. SNDL's stock price has been on the uptrend recently, but over the last few years has not performed well. The recent rally, which had its beginnings back in October, has brought all of the Canadian LPs to higher price channels. Holding SNDL for the long-run is still a moderate risk. I recommend this hold for now and will watch for a price dip and better news from the sector before refilling positions. The options market for SNDL, Canopy Growth, Tilray, and Village Farms is experiencing high volume and extreme open interest. These options plays come at a high-risk of the rally suddenly ending and prices downtrending. SNDL Q1-2024 Outlook SNDL will report its next quarterly earnings (Q1-2024) on May 9th. The current market estimate on revenue is US$153.77 million, representing an 18% decrease QoQ and a 2.65% increase YoY. The company expects lower operating costs in 2024. It plans to increase its exposure to business to business (B2B) opportunities and to international markets. SNDL expects its US investment holdings to increase in value and scale over the next year. The company enters its next reporting cycle with no debt and no outstanding cannabis excise tax. SNDL expects growth in its retail cannabis segment as well as its liquor retail segment. It cut down its cannabis product SKU count over the last quarter, which should show better margins in 2024. Investors can expect lower revenue numbers and a net loss for the next quarter. The company does not give us much insight into its 2024 expectations. It has shown overall growth per operating segment, and it is unclear what will cause the decrease in revenue from Q4-2023 to Q1-2024. The company receives revenue in part from 187 cannabis retail locations and 170 liquor / beer retail outlets. SNDL also receives revenues from licensing out its proprietary data analysis software, which it has from its relationship with NOVA cannabis. The company expects licensing revenue to increase over 2024. Operation costs should continue to decrease as the company has consolidated it grow operations, which should help improve margins on its manufacturing segment. Overall, investors can expect the same or a decrease in previous financial performance for Q1-2024. Conclusion  The historical news from the DEA is well needed for the US cannabis industry. US operators soon will be able to take basic tax exemptions on their returns, which other business have always been able to take. It will help the financial performance of US operators and will increase overall acceptance of the plant as less harmful. The rescheduling of cannabis has further steps to go before the benefits will be seen. The industry still awaits the passage of the SAFER Banking Act and ultimately federal legalization. The news today sent cannabis stock skyrocketing, but the rally will likely lose steam as larger market volatility enters the stage. I rate SNDL as a hold for now and will wait for a pullback and other synergies to appear before a buy rating is tenable.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432512238"}