BCO - The Brink's Company: Where Is The Money?

Summary

• The Brink's Company continues to pursue bolt-on dealmaking.
• Despite a low earnings multiple, much money is earmarked to dealmaking over share buybacks.
• Leverage and earnings adjustments are a bit too high for my taste, leaving me a bit cautious here about The Brink's Company despite a compelling headline earnings multiple.

Shares of The Brink's Company ( BCO ) have seen some challenges in recent years. The company, which provides safe transportation of valuable goods, has not proven to be of great value to investors.

A $30 stock rallied to the $90 mark in 2019, but fortunes reversed in a major way in February 2020. The company announced a massive $860 million deal for G4s cash options at the time, with the announcement of the transaction coinciding with the outbreak of the global pandemic.

Contrary to Fintechs, Brink's believes that cash remains here to stay, with money in circulation on the rise, and cash money being vital for the economy, certainly for those with poor credit shores. While that might be the case, the relative share of digital currencies is on the rise in most (developed) countries, of course.

Zooming In On The New Brink's

Early in 2021, Brink's posted its 2020 results, which of course included the impact of the pandemic and the contribution of the G4s acquisition. The net impact of all this is that revenues were stable around $3.7 billion for 2020, including half a billion sales contribution from G4s, offset by currency headwinds and organic sales declines with cash payments down across the globe amidst store closures.

GAAP operating profits fell from $237 million to $214 million, as higher interest expenses and tax rates left just $17 million in GAAP earnings on the bottom line, equal to $0.33 per share. Adjusted earnings were reported at $3.76 per share, with a myriad of expenses taken to explain the difference, including retirement pans, restructuring costs, acquisition costs and inflationary pressures in Argentina, among others.

With net debt posted at $1.87 billion and adjusted EBITDA reported at $566 million, leverage ratios were high at 3.3 times with little GAAP earnings power to reduce net debt. Investors furthermore found some comfort in the 2021 guidance with sales seen between $4.1 and $4.5 billion on which EBITDA was seen between $640 and $730 million, with adjusted earnings seen at a midpoint of $4.75 per share.

In April, the company announced a next bolt-on deal with ATM service provider PAI in a $213 million set which was set to add $320 million in sales and some $30 million in EBITDA.

Soft Performance

After guiding for sales at a midpoint of $4.3 billion in 2021, the company posted revenues of $4.20 billion in February of this year. The company posted adjusted earnings of $4.75 per share, in line with the initial guidance, as GAAP earnings only came in at $2.06 per share. Dealmaking and other uses of cash made that net debt rose to $2.26 billion, keeping leverage ratios above 3 times based on a $683 million adjusted EBITDA number.

This was supported by the anticipation of further growth, in part the outcome of dealmaking announced in 2021, as 2022 sales were seen around $4.6 billion and EBITDA is seen around $775 million, with earnings seen at a midpoint of $5.75 per share.

The 50 million shares traded around $70 early this year, for a $3.5 billion equity valuation, or $5.7 billion enterprise valuation. This valued operations at well over 1 times sales, about 8 times trailing EBITDA and 15 times adjusted earnings, albeit that the forward-looking multiple should come down a bit based on the 2022 guidance. The company maintained the guidance for the year after the first two quarters of the year, as the gap between GAAP and non-GAAP earnings narrowed significantly.

Net debt inched up to $2.43 billion, following more dealmaking, as leverage comes in at 3.1 times based on the midpoint of the EBITDA guidance this year, that is the forward metric.

More Deals

Despite a very low current earnings multiple (at around 10 times adjusted earnings), the company continues to earmark money for share buybacks and dealmaking, increasing absolute debt levels, but keeping leverage ratios around 3 times.

Early in October, Brink's announced a $179 million deal to acquire UK-based NoteMachine, a leading ATM network provider. The deal adds 9,000 ATMs to Brink´s inventory, adding $131 million in revenues and $36 million in EBITDA, with the deal being well-timed based on the exchange rates.

With 48 million shares trading at $55, the market value of Brink's has fallen to $2.6 billion, as the net debt load is equal to $2.6 billion as well pro forma the latest bolt-on deal. This shows that the market is not too comfortable with its leverage and the focus on adjusted earnings, albeit that GAAP earnings were only lagging to a smaller extent so far this year.

And Now?

With shares down to levels last seen in 2017, I must say that I am performing a real balancing act here. Brink's is actually seeing solid growth, despite some secular headwinds. Arguably, the appeal is based on a mere 10 times adjusted earnings guidance, but there are two caveats to that. The major issue relates to the focus on adjusted earnings instead of GAAP earnings, as the net debt load is a bit too high as well in an uncertain and high-interest rate environment, certainty as the secular outlook is not too fancy.

Given this, I see the appeal for Brink's based on the low fundamental situation. However, leverage and too-adjusted earnings prevent me from getting too upbeat amidst a challenging long term secular positioning, albeit that Brink's has seen solid growth in recent years.

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