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Bear of the Day: Brinks Company (BCO)

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David Borun
·4 min read
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Just like today’s Bull of the Day – Hexo Corp – the Bear of the Day was a component of the Marijuana Innovators portfolio. This one is not anymore. In fact, it was a huge disappointment.

I originally added the Brinks Company (BCO) to the portfolio because I thought they were about to become a dominant player in the transportation industry for marijuana products and the cash that retail sales generate.

It seemed like a perfect fit – an industry that was forced to operate in cash because of a web of archaic regulations and a company that could use their existing resources to reduce the inefficiency that those rules inflict.

Brinks was already collecting significant revenues transporting cash and cannabis products in Canada and CEO Douglas Pertz even called the marijuana industry a “beautiful opportunity.”  I thought I was reading between the lines in thinking that Brinks was about to enter the business in a big way in the US.

I predicted that Brinks would use their scale to gobble up huge market share in the business so that even when marijuana becomes legal nationally and the industry no longer had to handle large amounts of cash, they’d have established relationships and would simply transport less cash but more product.

Less cash, but a lot more product would equal steady or increasing revenues – that was my logic.
I was totally wrong.

At the time, Brinks was declining to service the industry in the US even in states with full legalization. I figured that was about to change, but it turns out that they remain unwilling to take any business from marijuana companies unless the products are made legal at the federal level.
I obviously don’t know what advice Brink’s got from their legal counsel, but plenty of large public companies deal directly with marijuana companies in states where it is legal with no apparent repercussions.

Brinks has given smaller competitors time to gain a foothold in the market, so that even when federal legalization happens, they’ll have a much harder time signing up customers.
The best growth companies constantly push the boundaries. They’re willing to take risks and butt up right against regulations (especially silly ones) at the exclusion of more conservative competition. Those who are willing to do what others aren’t generally enjoy higher margins because of the reduced competition.

It turns out Brinks is one of the conservative ones - and not in a positive way.

I think they could also soon be seeing big problems with their core (non-cannabis) businesses. Cash transactions are an exclusively in-person activity. Think about all the places that do business in cash and require the services of armed transport. Restaurants, bars, casinos, race tracks, retail shops, salons, etc.

They’re all closed. That means they’re not transporting cash and they don’t need armored transport.

Not surprisingly, earnings estimates for Brinks are falling like a rock. Over the past 60 days, the Zacks Consensus Estimate for the current quarter has dropped from $0.95/share to just $0.06. Q3 has fallen from $1.20 to $0.38 and the full year estimate is down more than 50% - from $4.40/share to $1.81/share.

Large downward revisions like that earn Brinks Company a Zacks Rank #5 (Strong Sell).  Some of the expected shortfall in revenues and earnings is due to the Covid-19 related shutdowns and a steep falloff in cash transactions. That’s not necessarily their fault, but it still hurts. Another source of pain is the fact that they lost the opportunity to at least partially patch that hole by taking a more aggressive position on servicing the cannabis industry and they failed.

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