2023-08-04 14:04:22 ET
Summary
- Brady Corporation is a manufacturer and marketer of complete solutions for identification and protection.
- The company's sales and earnings have been growing, with a net cash balance of around $100 million.
- Shares of Brady have been trading stagnant since February, but the overall appeal and potential for re-rating remains.
In February, I labelled Brady Corporation ( BRC ) still a safe place after initiating a position at $48 in November 2022. A mere 14 times earnings multiple for an unleveraged business looked very reasonable, and while shares have seen a reasonable return, the re-rating was only partially done, at least in my belief.
Since February, shares have seen a partial retreat, which together with a modest hike in the full year earnings guidance and growing net cash balance makes me upbeat again. While the appeal keeps increasing, I am not yet willing to double-down, but do hold a very upbeat stance on the shares here.
Brady - Complete Solutions
Brady is a manufacturer and marketer of what are described as ¨complete¨ solutions, used to identify and protect people, products and places. The business has a long legacy, having been around over a century.
The company´s identification solutions segment is responsible for the majority of sales, being the highest margin business as well, with products to think of include safety & facility IDs, wire IDs and related products. This is complemented by a smaller workplace safety business, derived from activities like selling signs, tags, labels and safety equipment.
The company grew fiscal 2021 sales by 6% to $1.14 billion, with operating earnings up 21% to $167 million, as GAAP earnings of $130 million came in at $2.46 per share, with adjusted earnings coming in nearly twenty cents higher. The business ended the year with a net cash position of around $100 million, used to announce some acquisitions subsequently.
The company guided for fiscal 2022 adjusted earnings to rise to $3.22 per share, on the back of organic growth and dealmaking, which looked quite impressive. In the end, 2022 sales rose by 14% to $1.30 billion as adjusted earnings came in at $3.15 per share, coming in a couple of pennies short to the original guidance.
Moreover, the company guided for 2023 earnings to rise further to $3.30-$3.60 per share in a volatile economic environment. This made me compelled at $48 in November, and while shares rose to the $55 mark in February, I still saw long term appeal for the shares.
This came as the company hiked the midpoint of the full year earnings guidance to $3.50 per share following the second quarter results, as the company maintained a net cash position of $31 million. Trading at 16 times earnings, I saw continued room for shares to move further upwards.
Trading Stagnant
Since February, shares of Brady have been trading stagnant, actually they have come down a bit. Shares have traded in a $48-$55 range, now trading at $51 and change.
In May, Brady posted third quarter results as revenues of $337 million were down half a percent on the year, although that organic sales were up 2%.
Amidst strong gross margin performance and operating expense control, the company reported that operating earnings rose from $53 million to $63 million, with net earnings of $48 million coming in at $0.96 per share based on a 50 million share count, a number which actually came down on the year before. Moreover, the company saw net cash balances increasing to $85 million.
The company hiked the midpoint of the full year sales guidance to $3.525 per share, comforting as net cash balances have grown to nearly $2 per share again. The somewhat softer sales numbers and CFO transition appear to be the reasons behind the somewhat softer price action, but the overall appeal is imminent again, with shares trading at just 14 times unleveraged earnings here, certainly as some of the worst currency headwinds are disappearing rapidly.
Still Holding Strong
With Brady Corporation shares having given up a few dollars, amidst resilient organic growth numbers, I am upbeat on Brady here again, even as reported growth is not too convincing in this inflationary environment.
An unleveraged business trading at a 7% earnings yield looks pretty compelling here, with net cash balances growing quickly in order to provide more fuel for bolt-on dealmaking again.
Whilst it is too early to double-down on the shares after initiating a position at $48 last fall, I am still very upbeat on Brady Corporation here, as I still anticipate a further re-rating over time, being a little bit disappointed by the recent softer share price performance.
For further details see:
Brady Corporation: ID Solutions Provider Looks Safer Again (Rating Upgrade)