SilverBox Engaged Merger I Is Just Another SPAC That Appears Bound to Disappoint

SilverBox Engaged Merger I (NASDAQ:SBEA) stock represents a SPAC (special purpose acquisition company) that raised $300 million in February and has a target.

An image of wooden blocks that say SPAC over a series of one dollar bills.
Source: Dmitry Demidovich/ShutterStock.com

My InvestorPlace colleague David Moadel called Black Rifle Coffee the “Starbucks of the right” recently. The coffee company caters to veterans and first responders. 

Moadel believes Black Rifle Coffee is a stock to bet on. I don’t see it that way. 

Feel free to buy their coffee if you’re a veteran, but I wouldn’t buy the stock, pre or post-SPAC. Here’s why.

SBEA Stock Isn’t the Best Buy

When the two companies announced the merger on Nov. 2, SBEA stock popped, jumping 15% on the news. It’s since given back much of those gains. It’s trading slightly above $13 as I write this. 

So, if you bought three SilverBox Engaged units in the February IPO, you’ve got three SBEA shares plus one whole warrant to buy another share for $11.50. If you were forced to exercise the warrant, you’d be sitting with a 38-cent loss on your $40.50 investment [3 times $10 plus $11.50 less 4 times $10.28 (current price)].

That’s over 10 months. If you bought $40.50 of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) in February instead of SBEA, you’d have $50.84, $10.72 more.

Alright, enough with the math. The point is, every dollar you pour into a stock that fails to perform in this market — we’re near record closes — is a wasted opportunity. 

Coffee Stocks in 2021

Company 

YTD Performance 

(Through Nov. 17)

Starbucks (NASDAQ:SBUX) 9.24%
Restaurant Brands International (NYSE:QSR) -2.56%
Dutch Bros (NYSE:BROS) 60.74%
McDonald’s (NYSE:MCD) 20.15%

As you can see by the table above, coffee-stock performance has been all over the map in 2021. Now, with coffee prices exploding, it will be harder for these businesses to pass along higher input costs. 

But if anyone has pricing power, it is SBUX. As for Black Rifle Coffee, it might cater to an attractive niche market, but veterans have to pay the bills just like the rest of us. Budgetary decisions could lead to fewer visits to the local location. 

And, in the end, investing is about making money. A bet on Starbucks over the past 10 years would have generated an annualized total return of 19%, despite its recent woes. As the saying goes, “It will rise again!”

To me, a bet on Starbucks is the smarter play.

Black Rifle’s Financials

As SilverBox Engaged Merger I’s management team told its investors on Nov. 2, it would merge with “fundamentally sound companies with strong growth trajectories.”

“BRCC is a digitally native, omnichannel business that is serving a loyal customer base in a massive addressable market. With projected revenues of more than $230 million in 2021 and $311 million in 2022, we believe BRCC already has the right foundation for sustainable growth,” stated the Nov. 2 press release. 

So, assuming it hits $230 million in 2021 sales, the 40% gross margin it touts [pg. 51 of its November 2021 presentation], suggests its marketing and SG&A (selling, general & administrative) expenses will be pretty high the next two years because it doesn’t expect to be profitable until 2023. 

At which point, it expects to have gross margins of 43.5% and an operating margin of 0.6%. At present, Starbucks’ operating margin is 14.3%, about its five-year average. 

It’s not always the gross margin that matters the most — as Dutch Bros. proves at 30.4% with a 3.1% operating margin — but how you control operating expenses as you scale your business. 

On pg. 43 of its presentation, it argues that its enterprise value of 5.5x its 2022 estimated revenue is relatively low compared to Dutch Bros and others. Maybe so. 

But when you can buy Lululemon (NASDAQ:LULU) at a multiple of 8.7x 2022 estimates, I don’t think there’s any question which one you should go for.

Black Rifle Coffee might be the “Starbucks of the Right,” but it’s not the stock to buy. It’s not even the best coffee stock to buy.

If you’re a veteran, buy the coffee, and pass on its stock.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. 


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