Stran Stock: A near spot trading marketing solutions provider (NASDAQ: STRN)
Companies can trade net spot or below net spot for many reasons. Usually these companies have a long history of destroying shareholder value, terrible corporate governance, or other skeletons in the closet.
Stran (STRN), however, is an odd case. It is a marketing solutions provider that recently went public, has grown sales at an average CAGR of 24% over the past 2 decades, and is a recently profitable company. However, the company is now trading below net cash after seeing a substantial decline in share prices over the past few months.
Founded in 1994, Stran has a nearly 20-year history as a marketing solutions provider for some of the world’s biggest brands, including more than 30 Fortune 500 companies. The company specializes in promotional products and merchandise, i.e. items such as t-shirts, bottles, displays, etc.
Source: Stran Investor Presentation
Promotional products is an industry worth nearly $26 billion in 2019 and has been growing at a CAGR of around 5% over the past decade. The industry was badly hit by the COVID-19 pandemic, with sales down around 20% in 2020, but has since rebounded, with nearly half of companies expecting 2021 sales to equal or exceed their performance in 2019.
The industry is highly fragmented, with market leader 4imprint having only a 3.3% market share, and the rest of the market split between 40,000 different companies. Stran currently holds approximately 0.15% market share of the core promotional products industry and has grown faster than the overall industry in recent years.
Additionally, the industry itself is only part of a much larger potential TAM worth up to $384 billion, comprised of product packaging (worth $180 billion dollars), loyalty incentive programs (worth $90 billion), printed materials (worth $75 million) and trade shows. (worth $17 billion).
Since its inception, Stran has grown its revenue at a CAGR of 22% as a private company. The company has over 2,000 customers and has been shortlisted for very large events, including delivering over 16 million products for the US Census in 2019-20. With substantial proceeds from its November IPO and subsequent offering, I believe Stran’s growth will only begin to accelerate going forward.
Despite being a 2-decade-old company, Stran has plenty of room to continue growing.
The most obvious is to shift transactional customers to program customers. Transactional customers are typically customers who place one-time orders with Stran, while program customers are typically customers who have an ongoing relationship with Stran. While only 350 of Stran’s 2,000 customers are program customers, those customers accounted for 77% of Q1-Q3 2021 revenue.
Next, Stran believes it can further enhance its current technology platform to more effectively serve customers and drive spending. Management is investing in a new ERP system on Oracle’s Netsuite platform, which is expected to be implemented in the first half of 2022.
Mergers and acquisitions should also be a major part of Stran’s strategy. In recent years, Stran has acquired 2 different companies – Wildman Imprints and GAP Promo, with a total of $17 million in ARR. Both acquisitions were structured as asset purchase agreements, with Stran typically only buying inventory for a small capital outlay and signing an agreement with each company to pay a certain % of gross profit over the next few years. .
Going forward, Stran will likely continue to be aggressive on the M&A front, targeting companies in complementary regions, companies whose technology is less good than Stran, and companies that can help Stran expand into new markets such as packaging or other areas.
At first glance, Stran’s finances don’t seem too impressive. For the first 3 quarters of 2021, Stran’s revenue declined slightly from approximately $28.5 million last year to $27 million this year. However, Stran’s real revenue growth was masked by the unique occurrence (once every 10 years) of the US Census, an event that Stran helped market in exchange for over $15 million in 2019 revenue. to 2020, sales of branded masks during COVID-19 which declined in 2021 as companies reduced purchases of masks as vaccines were rolled out, as well as the acquisition of Wildman Imprints in September 2020.
I created this chart, which shows Stran’s base revenue growth after removing these one-time factors. As you can see above, Stran’s core revenue declined in 2020 in line with the rest of the industry, but core revenue growth is expected to show double-digit growth in 2021 and 2022. In fact , base revenue grew 92% year-on-year. in the third quarter of 2021 at $8.9 million.
My assumptions for 2022 assume only a modest 10% year-over-year growth from the current operating rate of base revenue, and do not include the recent signing of a $6 million per year contract with a large national healthcare company.
Gross margins increased to 34% in the third quarter of 2021 despite the cost of freight more than doubling year-on-year due to supply chain issues. This is a very impressive performance at a time when many companies are facing significant issues related to record inflation and global supply chain issues. With a more normalized freight cost, I think Stran could have generated gross margins as high as 37%.
Operating income increased from $0.1 million in Q3 2020 to $1 million in Q3 2021, driven by strong revenue growth, offset by increases in operating expenses due to higher IPO expenses and Oracle Netsuite implementation. I think operating margins can increase significantly in 2022 when IPO spending normalizes and the supply chain environment improves.
The most compelling aspect of Stran is its valuation. In order to pursue its growth opportunities, management completed 2 back-to-back offerings (IPO and follow-up offering in December) which together generated nearly $40 million in gross proceeds, increasing the number of shares by 14, 3 million to 19.6 million (see most recent prospectus). After the recent stock price decline, the company’s market cap is now down to around $37 million, which is less than the gross proceeds of these 2 offerings (meaning the EV is less than $0) .
It’s unclear why the market is valuing Stran at such low levels as the company announces strong results and a multi-million dollar deal. Previously the company was targeted by stock promoters on Twitter as a low float stock, driving the stock price up to $8, and I’m guessing retail investors who bought into the hype are now selling at any price, even near or below cash. levels.
Competitor 4imprint, which appears to have lower margins, trades at around 1x sales. If Stran traded at this enterprise value, the company would be worth about $4.2 per share, twice the current price. However, with stronger growth and higher margins than 4imprint, I think this valuation is conservative.
As a recently profitable business trading below net cash, it’s hard to imagine the risks Stran could face. In my opinion, the biggest risk is corporate governance, because executives own more than 50% of the outstanding shares. If management makes bad decisions or wastes money, cash reserves will decrease. Additionally, the maturity and fragmented nature of the market could make it difficult to grow in the future without using substantial capital.
To take with
Overall, I think Stran is a very attractive investment at current prices. The company’s strong growth and recently proven profitability, coupled with a near-cash valuation, make it a potential low-risk, high-reward play over the coming months.