Quick Profits - BRP Special Situation Investment

Quite a lot has happened with recreational vehicle maker BRP (TSX:DOO)(NASDAQ:DOOO) since I wrote about it just a couple weeks ago.

Firstly, the company came out with earnings numbers that crushed the market’s expectations. Adjusted earnings came in at $3 per share for the quarter and $9.92 for the year, both increases of nearly 50% compared to the same quarter the year before.

The company also released guidance for the upcoming year, telling investors revenue at its various subsidiaries would be up anywhere from 24% to 29% for fiscal 2022, with normalized earnings increasing by 8-12%. That translates into earnings per share in the $10.50 to $11 range for the upcoming year.

These are stellar numbers, and the stock reacted accordingly. Shares were up nearly 10% on the day and have since moved higher. When I wrote about BRP, shares traded hands at $81 each. These days, the share price is $103. That’s a 25% return in just two weeks.

But we’re not here to do a victory lap. Although, admittedly, that is quite fun. We’re going to take a closer look at the other big announcement BRP made last week and how it could potentially lead to some quick profits.

Another Share Repurchase

Subsequent to earnings, BRP’s management announced another substantial share repurchase.

The details go a little something like this. The company will spend $250M on a share buyback using a modified dutch auction format. Shares will be repurchased in $0.25 increments ranging from a price of $103 and $123. Cheapest offers will get filled first until all the money allocated gets spent.

The company recently did another one of these buybacks. The last buyback, which was announced in June 2021 and completed about six weeks later, offered a range between $93 and $110. I bought in around $95, tendered for $105, and missed out as most shares ended up being tendered at $103.50.

I wasn’t stressed by missing out. Downside was pretty limited in that scenario, just like it’s limited today. Worse case scenario I had a position in a stock with terrific long-term results and a bright future that had just done a big share buyback. That’s exactly the kind of stock I want to own anyway.

And then shares rocketed higher and I was able to sell at a little over $110 each. That was a nice little short-term profit.

There’s also one important thing for retail investors to remember - the odd lot provision. Any tender offer is subject to proration unless you own less than 100 shares.

Say everyone tenders for $115. There are way more than $250M worth of shares outstanding, so all offers are prorated. You end up selling a small percentage of your shares. This proration doesn’t apply if you own less than 100 shares.

The criticism on odd lot provisions like this one is they’re not worth your time, but I’m not sure that applies to this one. BRP is a $103 stock on the TSX today. A 99 share position represents a $10,000+ investment. It’s a decent chunk of change for a retail investor.

This won’t be my only special situation investment I’ll cover. Sign up so you don’t miss a single one!

How I’m going to play this

My strategy is going to be a lot like the last time this opportunity came along. I just won’t be as greedy as last time.

The plan is to buy 99 shares for approximately $103 each and just watch the stock until the tender deadline (which is May 6th). The premium over the current share price I’ll offer will depend on what happens in the interim. If shares rocket higher, I’ll be happy to take my short-term gain of 10-20%. I won’t offer much above the current price. If shares stay closer to today’s level, I’ll ask for a little more.

I’m tightening my range this time for a few reasons. Firstly, the total buyback amount is smaller. 2021’s buyback was $350M. This one is $250M. Secondly, the Bombardier family has indicated they’re going to participate, which decreases the total number of shares available for us plebs to tender. And finally, I think I got a little greedy last time. A 3-5% total return over a month in a tax-free (or tax-deferred) account works out to a pretty succulent annual return. A 10% return might be asking a little much.

I find it helps to look at these special situations in a different way. I’ve spent maybe an hour looking at this deal. I’ll spend another hour finalizing the details at the end. If I can make $500 (a 5% return on $10,000 invested and two hours of work), that’s a pretty profitable couple of hours. Even if it’s only on a small portion of my portfolio.

Disclosure: I plan to enter into this trade on Monday, but not if the price goes nuts. No current position in BRP personally, but portfolios I manage are long.