BCO - The Brink's Company: Show Me The Money

2023-07-21 06:11:26 ET

Summary

• The Brink's Company has seen continued growth driven by inflation and bolt-on dealmaking.
• Adjusted earnings multiples look very reasonable and low, but adjustments are plentiful and aggressive.
• This and a somewhat higher leverage ratio prevented me from getting upbeat, with the long-term outlook leaving questions as well.

In October of last year, I wondered where the money is in the case of The Brink's Company (BCO) . The company continued to pursue dealmaking at a time, preferring this rout over share buybacks at a time when the valuation of its own shares was low. With leverage and earnings adjustments being too high for my taste, I was a bit cautious, despite a compelling headline earnings multiple.

While the company provides safe transportation of valuable goods, the same can not be said for the stock (recently). Trading at $90 in 2019, the company announced a $860 million deal for G4s cash options early in 2022, with the timing coinciding with the global pandemic. While Brink's continues to believe that cash is here to stay, shares have been lagging, still far removed from those highs.

About Brink's

Early in 2021 Brink's posted stable sales at $3.7 billion in 2020 as a half a billion revenue contribution from the G4s deal was offset by currency headwinds and the impact of the pandemic, and related to that the (temporary) closing of many stores, prohibiting cash transactions.

GAAP operating earnings fell from $237 million to $214 million, with adjusted earnings reported at $3.76 per share, with GAAP earnings coming in at $0.33 per share as the difference was caused by many issues, such as acquisition costs, restructuring charges, among others.

Net debt of $1.9 billion was high with EBITDA reported at $566 million as the company guided for a strong recovery in 2021, seeing sales up to a midpoint of $4.3 billion and EBITDA up to $685 million, with earnings expected to come near $5 per share. The company largely delivered on these numbers, albeit that net debt rose to $2.3 billion, in part due to a $213 million deal announced for ATM service provider PAI.

For 2022 the company guided for sales to increase further to $4.6 billion, with EBITDA seen at $775 million and earnings around $5.75 per share, although net debt ticked up further to $2.4 billion, in part the result of another $179 million deal for UK-based NoteMachine. With shares trading at $55 in October, the $2.6 billion equity valuation matched the pro forma net debt load.

With shares trading at 10 times adjusted earnings, that raised the question if money was best spent on bolt-on dealmaking instead of buybacks. The resulting 10 times multiple looked low, but I feared a 3 times leverage ratio and rather aggressive adjusted earnings adjustments.

A Modest Recovery

Since the fall of last year, share of Brink's have seen a modest recovery, having gradually risen to the $69 mark here, after shares peaked in the lower seventies in recent weeks.

In February, Brink's posted its 2022 result with full year sales of $4.54 billion coming in a touch light compared to the original guidance. The earnings numbers are notoriously difficult to read into as adjusted earnings of $5.99 per share look compelling, but GAAP earnings only came in at $3.63 per share with the difference being caused by no less than 8 adjustments. These include, among others, retirement plans, dealmaking expense, restructuring charges, inflationary pressures in Argentina, and antitrust issues. Net debt of $2.4 billion worked own to a 3 time leverage, with adjusted EBITDA reported at $788 million.

2023 sales are seen at $4.80-$4.95 billion, with EBITDA seen between $855 and $905 million, with earnings seen between $6.30 and $7.00 per share. On the back of these results, the company announced a 10% hike in its quarterly dividend in May, hiking the quarterly payout by two pennies to $0.22 per share.

In May, Brink's posted a 10% increase in first quarter sales to $1.18 billion which looks sound, but remember that we are living in a high inflationary environment. That was about the good news with adjusted earnings down three pennies to $1.16 per share, as GAAP earnings actually fell to $0.30 per share.

Despite the softer margin picture in the first quarter, the company hiked the full year EBITDA guidance range by ten million, increasing the adjusted earnings guidance by fifteen cents to $6.45-$7.15 per share, with net debt posted a $2.5 billion.

And Now?

The reality is that based on adjusted earnings, the multiple remains intact at 10 times earnings, albeit that I continue to be not happy with all the adjustments made to the earnings.

With leverage still seen at 3 times and realistic earnings multiples likely coming in the mid-teens, I am a bit fearful. Growth has been seen, due to M&A and inflation more recently, as long term questions on the business model can be asked.

Given all this, I see no reason to get involved even as continued topline and adjusted earnings growth is continuously seen. Given this, I am happy to continue to watch Brink's here and perhaps consider on dips, as right here the risk-reward is not necessarily hugely appealing in my book.

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