|Shares Out. (in M):||51||P/E||19.3||16.4|
|Market Cap (in $M):||3,121||P/FCF||25.5||17.4|
|Net Debt (in $M):||796||EBIT||254||320|
The Brink’s Company (BCO) is known for its armored trucks, yet much more of its profits come from cash management (money processing, vault outsourcing, managing ATMs, etc.), the transportation and the storage of high-value goods (like gold, jewelry, banknotes, etc.), and selling and servicing interactive safes called CompuSafes. The Company is the global market leader in these businesses, with the #1 or #2 positions in its key markets. Brink’s operates mostly in duopolies or oligopolies, with stable market shares, pricing power, and high barriers to entry given the logistical network effects that come with scale.
Now for the negatives. Brink’s has suffered from mismanagement for nearly a decade, resulting in poor service levels, declining financial performance, and a stock price that’s underperformed for years. When a new Management team was announced last summer, we began to diligence the relatively unknown incoming CEO, Doug Pertz. What we discovered was nothing short of glowing, both qualitatively and quantitatively. Pertz’s leadership at many companies during his career has consistently led to improved operations and valuations. For evidence, we observed the results at Recall Holdings, Culligan Water Technologies, IMC Global, Clipper Windpower and Danaher. Reference checks consistently ranked Pertz in the top 5% of CEOs they have encountered. In addition, we like that Pertz has recruited key managers from Recall Holdings to Brink’s and has been strengthening the Company globally across all ranks.
In terms of the opportunity to improve Brink’s, our fieldwork indicates no structural differences between its closest peers, which earn materially higher margins and profits, including those that have less scale and weaker brands. Comments were similar from all constituencies, including former Brink’s executives and current executives at competitors, customers, suppliers, and partners. If you were to ask competitors like Loomis they would confirm that there aren’t any structural differences between Brink’s and its peers. Following Pertz’s business review, he believes Brink’s has the potential to earn industry-leading margins as he upgrades the Company’s culture and strategy, sheds bloated corporate costs, and invests in technology and fleet efficiencies.
Insider Buying / Incentives
We note that top executives including CEO Pertz and CFO Domanico were in the market buying significant amounts of stock as recently as a few weeks ago in March with the stock then trading near all-time highs in the low $50 range. These purchases were above and beyond their ownership requirements and were completed despite top Management pushing for the majority of their comp in the form of equity already.
We believe Brink’s earnings per share will more than double from ~$2 in 2016 to ~$5 in 2019, or 40%+ above current Street estimates of $3.45. We model three major sources of improvement: U.S. organic growth and margin improvement, international organic growth and margin improvement, and acquisitions. Brink’s has nearly no net debt (note that we’ve included BCO’s half a billion dollar pension obligation in our net debt) and Management views thoughtful acquisitions in core markets as a meaningful driver of shareholder value going forward. If we apply a 17x multiple to our 2019 earnings estimate, we arrive at a stock price over $84 per share, which is more than 35% above current levels.
We believe there is even more upside to these estimates with additional acquisitions that are not included in our estimates. Acquisitions in this space tend to be very accretive and in many cases synergies exceed the profitability of the target since there are a number of redundant costs in a combination like labor which represents more than half of an armored carrier’s cost structure. We believe that with the additional acquisitions, BCO could earn more than $6 per share which is more than 80% above current Street estimates and at 17x earnings, we arrive at a stock price of more than $108, more than 75% above current levels.
We recommend reviewing BCO’s most recent Investor Day Presentation from March where Management does a great job of discussing the business and highlighting the opportunities ahead for the Company. As a sanity check for our estimates, Management has targeted EPS of $3.50 in 2019 which assumes the business increases EBIT margins by ~300 basis points from 7% in 2016 to 10% by 2019. This 10% margin target is below what peers like Loomis and Prosegur which are smaller, have less scale, and in many cases have less pricing power currently earn. Our fieldwork and analysis of Pertz’s past experience suggests that he is “conservatively aggressive” seeking targets that are tough, but beatable so we believe this $3.50 target is conservative. Not included in Management’s $3.50 target is another $1+ of earnings from contingencies (i.e. a buffer from 250 basis points of incremental margins Management believes it can achieve) and another $1+ from accretive acquisitions. Earlier this week, Brink’s announced a modest $200 million share repurchase program that extends through 2019 and wasn’t included in Management’s targets at the March Investor Day so this could be a source of additional upside depending on prices paid. We have not however factored any buybacks in to our estimates.
An illustrative bridge of BCO’s potential 2019 earnings power using Management’s framework from the Investor Day follows below.
While this is not something we’ve factored in our numbers, future consolidation in the space could lead to improved returns as consolidation and potential asset swaps lead to more favorable industry structures in those countries. Brink’s and its peers like Prosegur have talked about making acquisitions and consolidating the market, but they have not discussed scenarios where they swap assets. Such deals would allow Brink’s and its competitor to swap its operations in one country with its competitor’s operations. This would result in an improved industry structure (i.e. oligopoly to a duopoly for example) leading to increased pricing power, increased profits, and higher returns. In such a scenario we believe BCO could earn in excess of $6 per share.
Poor / mis-execution
Irrational competition (i.e. similar the way Garda had operated in the U.S. in recent years)
Results exceed expectations (i.e. earnings beats) due to improved execution
Multiple re-rating as improved results lead to improved investor confidence
Opportunistic share repurchases
|Entry||06/14/2017 11:54 AM|
Thanks for your questions martin92.
1. The $3.50 2019 EPS Target provided by Management at the Investor Day in March is based on $325m of EBIT / implying a 10% EBIT Margin. The build to get there (shown on Presentation Slides 20 and 125) shows incremental EBIT of $125m from North America, $58m from South America, and $27m in the Rest of World offset by $92m of what Management is calling a contingency. We think that the $92m of contingency ($1+ of incremental EPS = $92m of incremental EBIT * (1 - ~35% tax rate) / ~51m shares) is just a buffer that Management has put in there so investors are aware of the potential without having to commit to a higher number.
2. We don’t have a view on why they have been selling. While they have been net sellers in recent months, they still have over 6% ownership in BCO (3% direct economic exposure + another 3% exposure via total return swaps), have Board representation, and their public stance is that “intend to remain a large shareholder” per their most recent 13D/A.
3. We estimate that CEO Pertz stands to make between $40 - $48m based on an $80 - $90 BCO share price and assuming all awards fully vest. This consists of ~163k BCO shares Pertz purchased personally for $5.7m / average price = $34.87 per share (note that $3.2m of these purchases were done YTD in 2017 at an average price of $53.46 including his mid-May purchase of 9,600 shares for $586k / average price = $61.00 per share; each of these purchases were completed at or near BCO’s all-time highs and these purchases were above and beyond his ownership requirements of 5x base salary), 400k options with a $29.87 strike price, and 163k of PSUs and RSUs (54k that have already vested).