BCO, Brinks Company

[brittlerock]

I’ve followed this board since the post count was in the hundreds, now in the tens of thousands. I’ve not read every post, but I have read a lot of them. I have nothing but gratitude for Saul and many of the other folks who generously share their knowledge. I have benefitted greatly, both in terms of knowledge gained as well as financially.

While I’ve posted my thoughts about various topics, I’ve never posted information specific to a new investment opportunity before now. I felt I had little new information to add. Not all, but almost all my investments have come from this board. My portfolio does not mimic Saul’s or any other individual’s, yet, other than a few tiny, speculative positions everything I’m invested has been extensively covered on this board.

So, here’s my first venture at introducing a company I don’t recall anyone else ever posting about. I welcome comments and critique. I’ve opened a starter position in Brinks.

Brinks Company, founded in 1838 has its Headquarters in Richmond, VA. It’s hardly a start up. They brought new executive management on board a little over a year ago. At least three of the new executives have worked together at a different company prior to employment at Brinks. I believe they are shaking up this venerable, sleepy company and turning it into an earnings juggernaut.

I assume just about everyone knows the name and has an idea about what they do. They are best known for securely moving cash. In fact, they offer a whole host of services devoted to cash management; cash-in-transit is just one of them. They securely move all kinds of valuables for their customers including gems and jewelry, precious metals, securities, high-tech devices, electronics, pharmaceuticals, etc. They service ATMs, provide in-person and electronic perimeter security and guarding services and so forth. Pretty much all things related to managing cash and providing security.

Before I go any further, here are some numbers from the last 8 quarters. All numbers are non-GAAP as reported by Brinks. The %+/- is with respect to the same quarter, one year prior (as their business displays a lot of seasonality, Q/Q % don’t tell much of a story):
____________2Q17_____1Q17_____4Q16_____3Q16_____2Q16_____1Q16_____4Q15_____3Q15
Revenue(M)759.6____740.3______768.1_____734.9_____716.5_____688.9_____733.3_____739.9
Rev %+/-6.02_____7.46_______4.75-0.68
EPS________0.64_____0.57_______0.87_______0.66______0.39______0.31______0.55______0.40
EPS %+/-___64.10____83.87______58.18______65.00

Here are some highlights from the 2nd quarter conference call (fiscal year ends 12/31):
2Q17 Earnings call transcript: https://seekingalpha.com/article/4090727-brinks-bco-ceo-doug…
Slides: https://seekingalpha.com/article/4090584-brinks-company-2017…

Highlights of 8/17 2Q17 Meeting
CEO & CFO joined Brinks about a year ago
BRAND__REVENUE___COUNTRIES___REGIONS
Brinks___$2.9B_____108_________EMEA, LA, NA, Asia Pacific
Loomis__$1.9B______19_________Europe, NA
G4S_____$1.6B______48_________Europe, LA, Asia, Africa, NA
Garda____$0.8B______2__________NA
Prosegur_$1.9B______15__________LA, Europe, Africa, Asia, Australia

Expected CAGR: Revenue ~8%, Non-GAAP Profit ~27%, Non-GAAP EPS ~28%
Growth strategy: acquisitions and organic (2 quarters into a 12 quarter strategic plan)
EPS Guidance: 2016 Actual $2.05, 2017: $2.95 - $3.05 (raised $0.40 from 1Q17), 2019: $4.25
Total debt: $420.9M, Cash & equivalents: $173.7M

Operations in 40 countries, 1,000 facilities, 11,900 vehicles, 60,700 employees
Top 6 Markets: US, France, Mexico, Brazil, Canada, Argentina
Primary customers: Financial Institutions, Retail, Government

Core Services: Cash-in-transit, ATM services
High Value Services: Brink’s Global Services, Money processing, Vault outsourcing, Compusafe & retail services, Payments

Cash accounts for ~85% of global consumer transactions. Global cash market $17.9B. Worldwide cash growth in value and volume is ~5%/yr.

Operating profit of $60 million was up 52% over last year’s second quarter. The operating margin of 7.9% represents an improvement of 240 basis points and that’s on top of a similar year-over-year increase in the first quarter. Adjusted EBITDA for the quarter increased 31% and earnings came in at $0.64 a share which is a 64% increase versus last year.

For the first six months of 2017 versus the first half of 2016 organic revenue was up 7%, operating profit of $113 million was up 57%, while the operating profit margin of 7.5% was up 240 bps. Adjusted EBITDA was $174 million up 32% and the EBITDA margin was 11.6%. Earnings per share of $1.21 was up 73% versus $0.70 per share in the first six months of last year.

Here’s some more numbers from Yahoo Finance:

Market cap = $3.96B
Float: 49.9M, Avg Daily Vol: 400K, 16.8% insider held
Stock price: 9/1/2016 $36.54 8/31/2017 $78.45 (+$42 – 115%)
Cash/Share (mrq) = $4.10
P/E (ttm): 55.5

[SaulR80683]

Hi Brittlerock, Sorry it took me so long to get around to looking at Brinks and reading the conference call and the website.

Here’s how I see it: It sounds real good at first, new management, EPS growing fast, etc. But, most revenue growth is coming from acquisitions. Organic growth is 4% or 6% (something like that, as I remember).

And they are raising net income by cutting expenses by cutting the number of employees per truck, getting more efficient money counting machines, more efficient trucks, etc. But what do you do for an encore? Next year revenues will be almost flat and you can’t cut employees per truck again, and probably can’t put in even faster money counting machines, and year over year earnings comparisons will likely return to the 6% to 10% range.

In conclusion, you can probably get a good short term (6 months or a year) trade out of it, but at the end you’ll still be left with a somewhat more efficient Brinks company that moves money in armored cars. I’m looking for companies with a more expansive future, so it’s not one for me.

Thanks though for posting it with all the detail you included, as that got me to look further. If you disagree with my conclusions, I’d love to hear your reasons.

Saul

[tamhas]

Autonomous armored trucks, perhaps?

[EdGrey]

In this case, what is the difference between GAAP and non-GAAP?

I see future profit from investing in companies that troubleshoot all the problems with autonomous driving.

It looks like BCO is good for selling puts on it, assuming that the share price will generally go up for a while.

[brittlerock]

Saul,
Far be it from to challenge your investment acumen. But, here’s the way I see it. First, even though you say you always get into an investment position with the intention of being invested long term. You seem to have an uncanny intuition about when to get out. Over the time I’ve been following this board I’ve observed you enter and exit numerous positions. Translation: all companies that have a “time” at all, have at best a limited time. It’s really hard to keep an earnings engine running long term. So, if I can ride this for 12 - 18 months and see a significant increase in the stock price, I’ll take it. Even though they said that they are only 2 quarters into a 12 quarter plan. Maybe I can ride this one for 36 months or a bit longer?

In addition, I guess I either got or inferred more from the new management’s approach; they are putting more emphasis on their other services. I interpreted their sales team hiring to be an effort to increase market share. They specifically mentioned that they are now going after 2nd tier financial institutions which they apparently pretty much ignored in the past. It’s my understanding that the previous executives were content to rest on their laurels and collect a comfortable salary while the business “took care of itself”. I am pretty sure I read that they are doing more cross selling of services, emphasizing total cash management and not just secure transportation. Also, with the enormous fleet of trucks they have, it’s going to take time to replace them, the CEO even mentioned the lumpiness in truck replacement. And each new acquisition will have a fleet which likely will also need to be replaced. Also, the new trucks offer significantly lower repair and maintenance costs, not just the potential for reduced crews. And another kind of off the wall observation; with more and more states legalizing marijuana while it’s still against federal law, there’s suddenly a whole new bunch of businesses that are mostly cash operations because banks won’t provide them with business accounts or loans for fear of getting crosswise with regulators. In other words, I expect to see improvements in organic growth. It is true that revenues are growing slowly. Their earnings are coming mostly from cost cutting, improved margins and acquisitions at present. But they are putting more emphasis on their international presence. The opportunity for organic growth is much higher outside the US, particularly in Latin America and other regions as well.

Further, though they didn’t come out and say it, I got the impression that the cash-in-transit business is pretty fragmented worldwide. I believe they are taking a page from Brad Jacobs with their acquisition strategy. In other words, they could build their presence significantly for years to come, of course that brings with it the need to finance those acquisitions, so their level of leverage needs to be watched.

Additionally, I, like a lot of folks on this board am primarily invested in technology companies. I spent 30 years in the IT world and saw only a very few companies that survived very long. A lot of high flyers are either no longer in business or flying pretty low these days. It’s a brutal business. How long do you think Arista will last until someone (maybe even some of their employees - think Cisco) might have a better idea and start their own company. Will Shopify be around long-term? Actually, I think they will, but Talend, Mulesoft, Splunk, Twilio, Hortonworks, etc. are already in the IT dustbin in my opinion, even though I hold a couple of these companies.

I think Brinks is a much more secure company, cash will be around forever and cash utilization is growing at 5% a year both in volume and value. This company has been in business since 1838. They’ve survived every calamity that can befall a company including neglectful management (in my opinion, probably the one of the most fatal maladies any company can suffer). Long after all those high tech investments wither, Brinks will be around, still growing and paying a dividend (albeit, a small one).

So my verdict is I’m going to hang on to this one for a while and see where it goes. So far, I’ve only got a starter position. It remains to be seen if I increase my investment or bail out due to disappointing performance. As usual, my crystal ball is somewhat cloudy . . .

[XMFCochrane]

Brittlerock,

My jaw dropped when I saw you posted on Brink’s and stole my thunder by a few days!

So this is a company I just started following but have not yet initiated a position. As Brittlerock did, I like the new management too. They are growing the company through two primary means: growth by acquisition and margin expansion.

It’s definitely a growth by acquisition story. But the vast majority of acquisitions are the small, bolt-on variety and are immediately accretive to earnings. This is driving up debt but not too alarming levels…at least not yet. I actually think the strategy is similar to XPO, where the company is just taking advantage of an internationally fragmented market by gobbling up lesser competitors. Its latest acquisition of Maco in Argentina is a good example of what the company looks for. (You know the drill guys, I’m going to be quoting from my latest article. Sorry.)

Brink’s latest acquisition, and its largest this year, highlights the qualities it looks for in potential targets. In July, Brink’s announced it would purchase Maco Transportadora de Caudales S.A, a company that provides cash-in-transit and money processing services in Argentina, for about $209 million in an all-cash deal. On the company’s second-quarter conference call, from the transcript provided by S&P Global Market Intelligence, here’s what Pertz emphasized about the acquisition:

“Maco’s cash-in-transit and money processing operations will be integrated with our existing operations in Argentina, the fastest-growing country in our most profitable segment, South America … We’ll move quickly to achieve substantial cost synergies over the next two years, which should result in a post-integration multiple of about 6x adjusted EBITDA. We’re excited about Maco and our future in Argentina. Maco solidifies our already strong No. 2 position and will immediately strengthen our customer base and route density. We expect it to be slightly accretive to net income this year, and as demonstrated in our increased 2019 guidance, a significant contributor to future earnings and cash flow.”

As far as margin expansion, there are lots of levers they can pull.

While there are seemingly endless things the company is doing to improve its margins, one of the primary areas it is focusing on is the thousands of heavily armored trucks that Brink’s drivers motor around the world’s cities every day. On this front, Brink’s management had some big news. Later this year, the company expects to put 200 new trucks with a new wrinkle in their design on the road: separable body and chassis.

With this feature, Brink’s says it will be able to replace trucks in the future at about 40% of the cost it takes now to replace a truck. This is because a truck’s engine and chassis will naturally need replacing far quicker than the truck’s armored body. The new trucks will also reduce repair costs and accommodate one- and two-person crews.

You can read the entire article at https://www.fool.com/investing/2017/09/03/how-this-158-year-…

That’s 200 trucks out of about 12,000 vehicles. That’s a really big lever to pull and is going to take a long, long time.

I wasn’t crazy about a few things: valuation, the inevitable debt that accumulates from the growth-by-acquisition strategy, and the regulation risks. Last year India basically outlawed cash. It had to reinstate because its system couldn’t handle the sudden change but, it just seems to me there are some governments/cultures leaning in the whole cashless society direction (for better or for worse).

But I was generally bullish on the company. Those are just my thoughts though…

Matt
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

PS - Brittlerock, the company was founded in 1859, not 1838.