Black Rifle Coffee Looks Like a Better Buy Despite Share Dilution


BRCC Stock - Black Rifle Coffee Looks Like a Better Buy Despite Share Dilution

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It’s been three weeks since Black Rifle Coffee (NYSE:BRCC) announced it would redeem all of its warrants to buy BRCC stock in a cashless exercise. On April 19, investors learned that they would get 0.361 Class A common shares per warrant. At today’s share price, that’s the equivalent of about $6.36 in cash. 

Since announcing the redemption on April 4, BRCC has lost 42% of its value. The S&P 500 has lost 8.2%, or 80% less, in the same period. As my InvestorPlace colleague, Joel Baglole, stated the day after the redemption announcement, the move dilutes the company’s share count. 

The question prospective shareholders should ask themselves today is whether they should buy now, or wait for the redemption to be completed at 5 p.m. on May 4.

From the company’s perspective, a forced redemption of its warrants is a no-brainer. If its shares meet the trading requirement to force redemption of its warrants, 10 times out of 10, it will do that. 

While the company misses out on the cash generated by the warrants’ exercise at $11.50 a share, it cleans up its capitalization structure while diluting shareholders through one quick share issuance rather than a little bit over five years, the period they’re exercisable. 

Now trading at its lowest price since late March, the coffee company’s fourth-quarter results are in the rearview mirror. However, InvestorPlace’s Larry Ramer thought they were reasonably strong despite losing $300,000 on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). 

There is no question Black Rifle has a brand appeal that will continue to drive revenue growth in 2022 and beyond. My biggest concern in an economic environment like the one we’re in now is that BRCC stock won’t be able to maintain its gross margins. 

In 2021, Black Rifle’s margins were 38.5%, 380 basis points less than a year ago. With inflation continuing to take a much bigger bite out of consumer paychecks, one must wonder if it will be able to make money in 2022, as its guidance suggests. 

For the most part, however, I think the redemption dilution is already baked into its stock price, so those interested in buying need not wait for May 4. However, if it were me, I’d be looking at buying Starbucks (NASDAQ:SBUX) instead. Quality and scale matter in gloomy markets like these. 

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 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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