BRRLLY

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

BRLY is a diversified holding company focused on acquiring and operating businesses across a range of industries. It does not have a strong operational focus and instead relies on its CEO to drive value.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BRLY’s moat is evaluated as a 3 out of 5, indicating a narrow but present competitive advantage. Let’s take a look at why the company does have a narrow moat and where it fails in having a strong one.

  • Proprietary Software: BRLY’s moat is primarily based on its proprietary software and the systems for sourcing acquisitions in the lower middle market, allowing it to identify and close deals more effectively. The software gives BRLY data that others dont have, allowing it to take advantage of information that others miss, although this is not well tested and there is no clear correlation between the use of this software and strong returns.
  • Unique Access to deal flow: The CEO also claims that the company has the ability to take advantage of private sellers that wouldn’t want to sell to a bigger group or a competitor. These are sellers which have an emotional attachment to their companies and do not want a messy merger, and they prefer to sell to a person who they trust and have an emotional connection with.

However, BRLY’s moat is not wide due to the following reasons:

  • Limited Scale: While BRLY has some unique operational capabilities, this isn’t tied to a scalable business. Most of the acquisitions are small businesses that do not have economies of scale, and as such the company has to operate them separately, rather than creating a consolidated structure, which reduces its ability to create large scale cost advantage. This is evidenced by their high SG&A expenses.
  • Lack of Brand: BRLY is a relatively unknown entity and does not have a well-known brand name to attract customers or talents. In many of their acquisitions, for example, the companies often do not include the name of BRLY in their websites and publications, which shows that the company doesn’t have a brand name in those markets. This also makes it more likely for competition to show up at their doorstep.
  • Low Barriers to Replication: The company’s processes for managing and acquiring companies while effective, are not difficult to duplicate by competitors. There’s no indication they have a unique and special process for management, except that it is controlled by a single person- the CEO.

Legitimate Risks That Could Harm the Moat and Business Resilience:

  1. Key Person Risk: BRLY’s reliance on its CEO is a significant risk. The business model is heavily dependent on the CEO’s ability to identify, acquire, and manage businesses, which creates key man risk. If for any reason the CEO is unavailable or leaves, then the entire business model will be at risk.
  2. Integration Risk: The success of BRLY depends on the company’s ability to fully incorporate new acquisitions into the group and to make sure those acquisitions are performing well. This is always a big hurdle for acquisitions and it has proven to be fatal for many, many acquisitions. BRLY does not have a great track record of integrating its acquisitions and often needs to sell them if they cannot scale or perform well.
  3. Dependence on Market Conditions: In good economic times, it can be relatively easy to sell debt and finance acquisitions. However, if for some reason, markets turn for the worst, the availability of debt will be very limited, and therefore BRLY’s business model would not be as profitable as it is now. If there is less credit available, then the company will most likely make less revenue and profit.
  4. Competition: A high amount of competition in the industries BRLY is participating in could put pressure on margins, and reduce the number of good companies available for acquisition. This can affect both their revenue growth, margin growth, and future prospects.
  5. Regulatory Changes: Changes to laws and regulations could potentially impair its business model or increase its costs. If for example, regulatory agencies start requiring greater transparency and accounting in financial acquisitions, then the model of BRLY may not be as profitable and useful as it is now.

Detailed Explanation of the Business and Its Financials

BRLY’s business is that of a holding company, meaning the company buys and operates various other businesses from different sectors.

  • Revenue Distribution: BRLY’s revenues are derived from the various businesses it acquires and owns. These businesses span across different sectors including: manufacturing, consulting, marketing, food services and etc. The lack of a particular focus makes it hard to evaluate the individual segments and the company as a whole, which is also something stated by the CEO in multiple earning calls. Due to their diversified nature it is difficult to pinpoint the primary revenue drivers or the main sources of profit, other than to say that they are extremely reliant on the companies that they acquire.
  • Industry Trends: In the industries BRLY is involved in, we’ve seen a growing trend towards consolidation, as larger companies seek to gain more market share and achieve economies of scale, or more integration with their existing systems. Furthermore, companies are increasingly facing global competition and have to develop international capabilities to win, which puts a lot of pressure on the small mom and pop style of businesses that BRLY buys. This also forces companies to focus on their core competencies to be able to compete against bigger and more resourceful players.
  • Margins: As a result of the variety of businesses that BRLY holds, profit margins also vary greatly from business to business, from a relatively high margin of 20% to almost negative margins in some acquired businesses. Typically though, most of the smaller acquired businesses have low margins and high volatility, which make for an interesting mix when analyzed as a whole.
  • Competitive Landscape: The competition in BRLY’s businesses varies from high to low. The manufacturing and commodity related industries are highly competitive, whilst other industries have a much lower competitiveness. However, BRLY’s main focus on private acquisitions in the middle market seems to protect it from direct competition from other larger investment firms. However, many other smaller investment firms operate in this space.
  • What Makes BRLY Different: This company differs from its competitors by using proprietary software to find and close acquisition deals quickly, focusing on deals where the seller needs discretion or emotional security, while leveraging a consolidated company to improve performance at smaller acquisitions. Its CEO also manages most of the acquisitions with only limited support staff, which further reduces operating expenses.

Financials:

Let’s do a deep dive in their latest financial statements and earnings calls.

  • Latest Results: The company has not reported an official 2022 financial result, but its preliminary results which were released in the 10K document on the SEC website are as follows:
  • Revenues: In 2022, the company earned $682.86 million in revenues
  • Gross Profit: Gross profit was $205.74 million.
  • Operating Income: Operating income was $37.68 million.
  • Net income: Net income was $7.85 million, down from $79 million in 2021.
  • Revenue Growth: In the past 3 years, BRLY has grown their revenues by approximately 70% annually which is an amazing growth rate and it could be a positive thing that they are generating such impressive revenues. However, it’s important to note that the growth was mostly due to acquiring new businesses and did not come from organic revenue expansion in their underlying businesses, which is not ideal for long term value creation.
  • Operating Profit: The profitability of the business has been incredibly volatile, with multiple years of losses and few years of strong profitability. As discussed before, these fluctuations often stem from the company’s strategy to acquire many businesses that have different financial profiles and business models.
  • Profitability: Net income is incredibly volatile and difficult to predict. From a total net income of $79 million in 2021, the net income fell drastically in 2022, to just $7.85 million. Some of this drastic decline is attributed to the high goodwill impairment they needed to account for in the balance sheet, as some of the acquisitions did not pan out as planned. A large portion of the net income is also attributed to gains on sale of assets, which makes the profitability look more speculative rather than organic.
  • Cash Flow: BRLY’s cashflow is positive, but is relatively low, meaning the company does not have a large amount of resources at its disposal to make acquisitions. Due to this, they are reliant on taking on new debt to finance their operations and their acquisitions.
  • Debt and Leverage: BRLY’s debt is high when compared to its market capitalization, though they do have long term debt with a rather low interest rate. Currently, they have a debt of around $1.1 billion. This high leverage increases the financial risk of the company. The interest payments can be easily covered by profits, though it does impact their overall profit margins, especially at times when rates are high. A higher interest expense reduces net income.
  • Management Comments on Latest Results: Management has stated that the company is going to focus less on acquisitions, and more on profitability going forward. This came after a poor year, in which acquisitions didn’t meet profitability requirements, goodwill had to be marked down, and revenue did not grow by enough. This new goal is to prioritize value creation rather than expansion.
  • Share Dilution: BRLY’s shares outstanding have been growing dramatically over the past few years, both through stock options and equity financing. This increased the number of shares from just 5 million to over 120 million in the past 3 years. Further stock sales will dramatically dilute the shares of existing investors.

Understandability: 2 / 5

BRLY’s business model can be somewhat hard to fully grasp and understand. On paper, it seems simple; acquire, improve, and then exit a company for a profit. However, this is an extremely difficult task to accomplish, and requires lots of expertise and knowledge. On top of this, it is difficult to understand which particular companies they are investing in and how they all fit together to create a well-functioning organization. These diverse acquisitions make it hard for a regular investor to track and analyze the company’s financial statements. I give it a 2 for understandability because the business itself is simple to comprehend, but the complexities behind the business model and the many disparate acquisitions that make up the company create an overall hard-to-understand picture.

Balance Sheet Health: 4 / 5

BRLY’s balance sheet health is considered a 4/5, which indicates that it is generally healthy, but has certain risks and problems. On the good side, BRLY’s assets are considerably larger than their liabilities, indicating that the company has the assets to pay off their liabilities. Most of their assets are tangible, including their equipment, properties, and their existing businesses, which makes it unlikely for the value to be over stated. The company also keeps a small amount in cash, which provides some flexibility for its short term operations. However, as discussed earlier, the main issue for the company is its large level of debt. Even though the debt is structured with a long term rate and very few short term obligations, the high debt load makes the company more financially volatile. As such, its balance sheet is healthy but can be threatened given the high debt load. It should also be noted that while goodwill is still a large portion of the balance sheet, management was required to impair goodwill, meaning they made mistakes in their acquisition process, or the companies they bought are not performing as they originally intended. Overall, while the balance sheet is fairly well-structured, its heavy reliance on debt prevents it from achieving a truly healthy balance sheet rating.