I guess this is shaping up to be another “marijuana week” here at Stock Gumshoe… this latest pitch talks up a chance at making five times your money on “a marijuana stock opportunity that almost NO ONE is talking about yet.”
Which, of course, is music to our ears — we do love a good mystery!
The newsletter being pitched is Alpha Investor Report (“on sale” for $47/yr) from Charles Mizrahi, who has teased some interesting stocks for us in the past (the two that stick in my mind are Xilinx (XLNX) a couple years ago and Huntington Ingalls Industries (HII) several years ago, mostly because I missed those appealing long-term growers and was grouchy about it… though I do own some XLNX shares now).
And, like some other pot stock pitches we’ve seen, this one is sold to us using the “picks and shovels” metaphor — the idea being that in a gold rush, you want to be the one selling the picks and shovels to the miners, not the guy digging a hole in the wilderness and hoping for a score. It’s an appealing story, and one that has become easy shorthand for investors (we’ve been teased about “picks and shovels” plays on bitcoin, iPhones, actual miners, you name it), though, of course, it doesn’t always mean you’re going to get rich. After all, the shovel salesman doesn’t take nearly as much risk, but he does make a lot less money than the guy who discovers the gold.
Here’s a bit from the ad:
“The best way to reap true, lasting, life-changing profits is to identify the pick-and-shovel stocks that are fueling it.
“Like the company I’m going to shed light on for you in just a moment.
“My analysis indicates that this one stock alone has the potential to hand you up to 500% as the legalization of marijuana continues to unfold — with a greater degree of safety and dependability than any wild-eyed penny stock can ever give you.”
OK, so I’d get that 500% out of your mind… though he’s probably not too far wrong on the “safer and more dependable” bit, at least if you’re comparing this to profitless penny stocks. What else?
“My #1 Pick-And-Shovel stock has posted a 31% gain in less than two months”
From the chart he shows in the presentation, that means it went from about $59 to $78 over some recent period of time.
What kind of “picks and shovels” does this company sell? Apparently it’s something to do with security. Of marijuana companies, he says that…
“… their runaway success has created two huge problems.
“The first is finding a safe place to store the mountains of money they’re making.
“The second is finding a safe way to move the marijuana itself….
“All of that cash on hand makes for a VERY tempting target for thieves.
“Likewise, with marijuana fetching as much as $3,000 a pound in some states, the marijuana itself makes for an irresistible target as well.
“As California edibles producer Mark Mason told Rolling Stone magazine: ‘We carry more cash than banks. You can’t walk into a bank and get $300,000 in cash. You’d make more money robbing us. It just feels like, wow, now that my business is completely legal, it’s more dangerous than ever.'”
OK, so if you’re writing a hardboiled mystery about thieves, you’re probably thinking that marijuana is one of the last great cash businesses, and maybe that’s who your gang of robbers should target (sorry, I still miss Donald Westlake, his Parker and Dortmunder gangs would have had a field day with legal pot shops bursting with cash)… but what does that mean in terms of investing?
Well, we’re being teased with a security company of some kind… from the ad:
“This Virginia-based company has the ability to provide marijuana businesses a safe, guarded way to store all their cash.
“Plus, they also give growers a safe, guarded way to get their harvest to the dispensaries that buy their crops.”
And they’re international, too…
“… they’re set up to do it not only across the U.S., but throughout all of North and South America.
“They’re already a major player in Canada, where marijuana was legalized nationwide late last fall…
“… one of the largest cannabis companies in Canada, if not the world, has already inked a multi-year deal with them….
“… they are poised to dominate the market in both North America and South America. Two ENTIRE continents.”
So who is it? This is, sez the Thinkolator, the name on the armored car fleets that probably make their way around your city: The Brink’s Co. (BCO)
And in case you want an illustration of the match… here’s my version of the chart that I’m pretty sure Mizrahi is using in his ad, which would be “within two months” from the December 24th lows…
And here’s a snippet of the chart he used in his ad, just for comparison’s sake (you can see the whole ad here if you like):
This is what the stock has looked like over a longer period of time, in case you’d like some context (this is total return over 25 years or so):
So you can see that Brink’s has been recently dominated by a huge move that the stock made in 2016… where did that come from? Is that a marijuana story? The big stuff like share count, revenue and earnings didn’t dramatically peak in any way in 2016, so it must be some kind of change in the story.
I haven’t ever researched this one before, but it looks like it was a restructuring, forced at least partly by activist pressure from Starboard starting in 2015, that got the Brinks truck rolling, jolting it out of the 5+ year period of relatively flat performance following the financial crisis by replacing the CEO, borrowing money to do some buybacks and bolt-on acquisitions, and perhaps improving the operations to some degree.
And it has been working pretty well, at least according to their latest investor presentation, with acquisitions (particularly of competitor Dunbar) and margin improvement helping to boost cash flow and earnings.
The challenge, I suppose, is that security solutions like this are generally pretty low-margin — even one of the largest companies in the world like Brinks ends up netting a very low net profit margin, usually 2-3% or so. There are presumably economies of scale in the security business, particularly when it comes to systems and branding and the network effect, but there aren’t necessarily huge opportunities to get dramatically more efficient when it comes to actually providing the service… you need to have the armored trucks and the people and the security monitoring, and cutting back too much on the service to compete on price means you’re going up against smaller companies who are much less worried about risking their reputation.
They do have some good international breadth, though, and there is certainly some value in having a large network of people and equipment that can provide assurance, particularly to larger companies who have growing footprint in the industry, so I guess the hope is that they’ll lever the route business they already have with banks and jewelry stores and other cash-heavy retailers and just tack on some pot business on top.
On the flip side, we’re also likely going to be moving to a less cash-intensive marijuana industry — security will still be important, just like it is for a liquor store, but as banking rules are relaxed marijuana companies will be able to accept credit cards and cut down on their reliance on cash, and cash management is really the core service that Brink’s offers. That might be a gradual thing, since not everyone is going to want to see the “High Times Dispensary Co.” on their credit card statement, but I assume we’ll move to a less cash-dominated business.
Securing the actual crop and the product will be important, too, but that will probably also evolve. Presumably we’ll end up with some kind of security presence that puts the transport and logistics for marijuana somewhere inbetween those used by liquor distributors and pharmaceutical distributors — I’m guessing that in ten years we won’t see every marijuana dispensary getting their shipments by armed guard, but for the next few years we certainly might.
That’s all my guessing, though, what we’re dealing with is a large international security company, mostly an operator of armored truck routes that provide cash management, that’s being teased as a marijuana “picks and shovels” play. Marijuana is a vanishingly small part of their business in revenue terms right now, though that could, of course, shift over time if they can grow that segment… so how do the financials of Brink’s look now?
Well, the international part has been a drag… as you might expect. Reporting South American or European earnings in US$ has been a negative of late, thanks to the strength of the dollar, and a few of the countries where they have long had a substantial presence have certainly been going through hard times — notably Venezuela and, to a lesser degree, Argentina (though it might be that the worst is over for those businesses, at least in terms of currency-related writedowns).
Marijuana companies are not big enough customers yet that they get any emphasis from the company in its reporting, but they did just sign a large partnership deal with Canopy Growth back in November to provide secure logistics and cash management services… with part of that deal meaning that Brink’s gets to cross-sell to Canopy’s growers and retailers, so that could bring some growth in the Canadian market.
That was worth a quote from the CEO of Brink’s, but since Marijuana has not yet come up in their forecasts and wasn’t in the latest conference call, I’d hesitate to change my expectation for the future of the Brink’s business just because they’re trying to get more into serving the Canadian pot business.
I can see why they’d be interested in jumping on the pot business — after all one of the great risks to Brink’s and its competitors is that their services become less necessary as the world becomes more cashless (while they haven’t issued any press releases about marijuana, they did about the argument that followed Amazon’s flip-flop over going cashless with its “Amazon Go” stores) — but the notion that it’s going to transform the company dramatically in the short term seems very over the top. Doesn’t mean Mizrahi is wrong, but I think his ad pretty absurdly overhypes the marijuana connection and its ability to drive results… the only analyst note I’ve seen about Brink’s and cannabis guessed that it might provide as much as $250 million in revenue by 2022, which sounds impressive and would, I’m sure, be a welcome new growth avenue for Brink’s, but that would also represent only about 6-8% of the business at that point. We’ll see how it turns out.
They will not, by the way, be getting into the United States pot business unless we get a much clearer legalization decision from the feds — Brinks has major relationships with all the big banks that are worth a lot to them, and I’m sure they won’t jeopardize that by dabbling in semi-legal businesses. So that’s another possible growth driver, though probably still of marginal near-term importance, if we see federal legalization make some real progress.
Brink’s is not particularly expensive, probably partly because investors are hesitant about the declining importance of cash — it remains a bit cheaper than most of the companies it considers peers (business-to-business service companies that offer regular route services, like Cintas, Waste Management, Rollins or Stericycle), and if you like the look of their strategic plan (they outline it pretty well in the latest presentation) you can probably justify buying the shares based either on the relatively sane PE ratio (14X next year’s earnings forecast) or the anticipated growth in cash flow that they see following the third year of their restructuring/turnaround plan, but betting on a 100% return is well outside the consensus (analysts on average expect about a 30% return over the next year — which is pretty impressive in itself, but not quite at “newsletter hype” levels). There’s a good but slightly-dated summary of Brink’s in a December Bloomberg article that can give you a quick backgrounder.
So there you have it… an interesting stock, a rational valuation, but the connection to marijuana is a bit tenuous and not likely to be the reason for the shares soaring unless that takes hold as a new “narrative” in the market. Sound like one you’d like to dabble in, either for marijuana or non-marijuana reasons? Let us know with a comment below.
Disclosure: Of the stocks mentioned above I own shares of Xilinx. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.