Black Rifle Coffee is Going Public
Summarizing last week’s trading, the large-cap S&P 500 lost .52%, the Nasdaq 100 decreased by .91%, and the Dow Jones Industrial Average fell .97%.
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Weekly Wisdom
“Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that never would have existed but for the formation of the first link on one memorable day.” -Charles Dickens
I wrote that passage in a journal on March 6th, 2004, at a time when I was still trying to figure out where the future links in my chain would lead. At every point in life, we are a unique combination of events that came together through circumstance, luck, and intention. To say the perspective that we can offer to the world is uncommon would be an understatement.
TIPS, I wish I could say it is good to see you again.
Early in my career, it was very common to see TIPS utilized in portfolios. First off, what are TIPS? It’s an acronym that stands for Treasury Inflation-Protected Securities (TIPS). They are a type of fixed-income security where the principal increases with inflation or decreases with deflation. They haven’t been part of our portfolios for quite some time because inflation was a minor nuisance in prior years. Now that inflation is the 800-pound gorilla in the room again, we are bringing them back because we believe they solve some of the problems with ordinary investment-grade bonds. What problem is that?
Take a look at the Vanguard Total Bond Market BND. It currently yields 1.95%. The inflation rate based on the Consumer Price Index (CPI) just was increased to 6.2%. Ouch! The second-largest Bond ETF is only paying 1.95% but my dollar is declining by 6.2%. TIPS allows us to take advantage of the rising prices of goods.
We have several components within our models that attempt to take advantage of inflation. These components include precious metals, commodities, real estate, and now TIPS.
Black Rifle Coffee is Going Public
2020 caused a big shake-up in so many norms that we are used to. In the investing world, a big shift was the way in which companies go public. There has been a growing phenomenon of companies going public via SPAC or Special Purpose Acquisition Company. A few months ago we discussed SPACs in more detail on the podcast, you can listen to that episode here. To explain it briefly, the process normally includes a company going public with an IPO (Initial Public Offering) where a company engages in the lengthy process of making a deal with an investment bank to underwrite the deal, conduct due diligence and research risks, go through regulatory hurdles, and generate hype and excitement to make sure the IPO is a success. If a company goes public via a SPAC, a company with no operating business will go public with the sole purpose of raising a large sum of money and merging with a private company. For the private company that is wishing to go public, they don't have to go through many of the regulatory hurdles and go straight to the end goal of raising money and offering shares to the public.
For those who aren't familiar, Black Rifle Coffee Company is a Veteran-founded coffee company that sells premium coffee online and has a large online presence through social media and Youtube. They currently have 270K subscribers to their “coffee club” which is a monthly subscription that delivers coffee to your door. They currently have retail partnerships with large nationwide brands like Bass Pro, Cabelas, select Walmart locations, and other retailers. They have a large online presence with over 9.1M followers across Facebook, Instagram, Twitter, TikTok, and Youtube. To put that in perspective larger companies like Lululemon, Yeti, Peloton have 7.7M, 3M, and 2.7M followers respectively. Black Rifle (BRCC) also hit 3.4B impressions across all platforms in 2020.
Their main source of revenue is from Direct to Consumer sales through online retail making up 84% of their revenue with 14% coming from wholesale to retailers and 2% from concept stores they call “outposts”. BRCC has some notable metrics that show brand loyalty from consumers. In their investor report, they claim the industry turnover rate for subscription services is roughly 10% of customers who don't continue the service. A company with a low “churn rate” is Netflix with a churn rate of around 2%, BRCC posts a churn rate of 3-4% which is less than half the industry average.
Going forward, BRCC sees most of their revenue growth coming from physical stores (outposts) representing 216% CAGR from 2021-2023 and less growth coming from direct to consumer, 13% respectively. The nationwide expansion of retail stores will need lots of capital which is what they wish to accomplish by going public as well as making a sizable donation to BRCC’s Foundation, the donation will consist of 530,000 shares. The deal will raise 225M in cash and the previous owners will retain 68% ownership of BRCC.
If we compare BRCC to similar brands we see that the valuation is grounded in reality. If we take their projected 2023 revenue growth, it's comparable to other high-growth food and beverage companies. BRCC is projected to grow revenue 38% on average over the next 2 years with an industry median of 37% and if you compare BRCC to direct-to-consumer lifestyle brands the industry average is 24%. If you compare the valuation to this revenue growth its trading much cheaper than the industry average and cheaper than names like Monster Energy and Beyond Meat.
When companies go public there is a certain amount of added risk because there isn't a documented history of growth or history of how the company handles tough quarters. For investors with higher risk tolerance, there could be an opportunity here based on their projected growth and enterprise value. There is always a risk that the company does not meet its projections, and there is a risk in the current environment that sourcing and the international supply chain could strain their imports. While their coffee and distribution are in the United States they still source their beans from 3rd parties. If you are interested in investing I highly recommend you read the investor report and make sure it fits in your risk parameters. This is not a recommendation, consider all risks before investing.
Loss of Use (Rent) Coverage
Home values have risen significantly over the past several years. Owners of rental properties have had the option of cashing in on their investments or continuing to collect rent as a stream of income. Dwelling Fire Policies (DP3), are types of insurance policies designed to provide coverage for rental properties. One of the coverages that come with these policies is “loss of rental income”. If a fire or covered loss prohibits the ability of the owner to rent out the unit while it is being repaired, loss of rental income coverage ensures the owner’s investment income does not stop due to a covered loss. Coverage for the loss of rental income typically stops as soon as the unit is repaired and able to be rented again.
Tax Deferral Options Just Got Bigger!
401(k) and 403(b) plans salary deferrals are increasing in 2022 from $19,500 to $20,500. If you are over the age of 50 you can contribute an additional $6,500.
SIMPLE IRA plan deferrals are increasing from $13,500 to $14,000. If you are over the age of 50 you can contribute an additional $3,000 more.
Unfortunately, no increases have been made so far to Traditional or Roth IRAs for 2022. The contribution limit remains at $6,000 for those under age 50 and $7,000 over age 50.
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