At Independent Research we look for a comparative advantage in similar securities in different markets. The vast majority of the Brambles logistics business is outside Australia yet rarely is there an attempt to find peer group valuation outside Australia. US markets have been led by transports and industrials, a bullish technical sign and an opportune time to visit the valuation for Brambles by comparison with its US counterparts which we believe is a more compelling peer group than its ASX comparables given its exposure to Northern hemisphere customers. There are no direct listed counterparts for Brambles which is why we see plenty of information about valuations based on discounted cash flow (DCF) and return on invested capital (ROIC). Independent Research has turned to the major customers and markets which Brambles serves to make a valiant attempt at a comparison on the basis that Brambles cannot do a lot better or worse than the customers it serves. Why has Brambles lagged in this excellent and what is our benchmark?
The share price performance of Brambles following the announcement about the retirement of Tom Gorman the current CEO is reminiscent of previous retirements at Brambles and for that matter many other leading companies.
The cult of personality has been led by the media and many other industry and financial participants who perceive personal disadvantage from a change which has magnified the personality downgrade.
It is worthwhile remembering what Warren Buffett had to say about not investing in personalities ..
"I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."
We are not suggesting for a moment that Mr Gorman's successors are idiots simply emphasizing another Buffett quote..
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."
So in the case of Brambles we are talking about an enormous moat and a business that has already invested heavily recently in its own future which is therefore unlikely to be a drain on nearby gains. There has been talk about the new team resetting the base which we believe is unlikely based on current forecasts for 2017.
The real question is the valuation and the peer group comparison which we would argue is driven by home bias in Australia and not by valuations in the main geographies where Brambles does business.
We are not arguing that Brambles is a Buy a Sell or Hold simply that there are other suitable benchmarks than the ASX alone to make a decision about its worth not just on a theoretical calculation based on past numbers.
There is no doubt that Brambles is creating shareholder value when you compare the Return on Invested Capital with its weighted average cost of capital.
We would also argue that the choice is about investing in fast moving consumer goods and transport first and then the best performing opportunity rather than in a formula about value regardless of its academic validity.
Readers can draw their own conclusions from the following numbers.
Let’s start with five of Brambles biggest users and see how the industry sectors in which they are represented are performing lately.
The first number is the current performance rank out of 198 sectors the second number in brackets is the rank six months ago.
P and G Cosmetics 166 (123)
Coca Cola Beverages 163 (146)
Unilever Packaged Food 142 (50)
Walmart Major discount retail 167 (174)
The improvement in Walmart and retailing’s ranking reflects the end of the honeymoon for Amazon (but that is another story).
Independent Research likes to be in the top current ten rankings which at the moment include banks, minerals, education, coal and steel. We especially like to be in industries which are rising not falling.
Next, we have used as our benchmark, an Exchange Traded Fund The Spdr Consumer Staples XLP which contains the largest weighting of all ETFs for our benchmark stocks.
For the record here is the performance of this small sample over the last 12 months.
Consumer Staples XLP Plus 6%
Walmart WMT Plus 21%
P and G PG Plus 9%
Colgate CL Plus 5%
Coca Cola KO Minus 1%
Unilever UL Minus 5%
These are hardly inspiring numbers by comparison with a 15 per cent improvement in the Dow year to date. Even less inspiring by comparison with United Parcels Service UPS up 24% and Fedex up 37% year to date.
Thirdly, how do the numbers for the industry, Consumer Staples, and Brambles biggest customers look right now.
By comparison the range of numbers we have seen for Brambles are around
PE 2017 21 times
EV/EBITDA 10.6 times
EPS growth 10-19%
Price to Book 4.6 times
Net Debt/Ebitda 1.5
Brambles is creating shareholder value and has a great business with massive competitive advantages that will be hard to replicate. It has upside potential from an improvement in ROIC which will flow from energetic new management next March.
It is a stock that is suitable for portfolios looking for offshore exposure however there is better value elsewhere amongst its Consumer Staples peers and comparable value in the Consumer Staples ETF for those prepared to venture outside the ASX.
It is not our first choice and it is not the bargain we would like to pick in the current market.
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Over 30 years in Australia, South Africa, London and the United States John Kimber has worked in investment research, advisory, and corporate finance at Prudential Securities, BT Alex Brown and Ord Minnett. He completed his series seven...
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