Summary
- I bought some shares of Brady Corporation at $48 in November.
- A mere 14 times multiple for an unleveraged business with solid current momentum looked very reasonable.
- Brady Corporation shares have seen a nice move higher over the past months, as part of the re-rating has been done, but not completed yet.
In November, I issued a positive ID on shares of Brady Corporation ( BRC ) in this premium article after the company displayed a solid year of execution. A strong performance and a lagging share price have reduced multiples a great deal, as this observation and conservative financial practices looked rather compelling.
Complete Solutions
Brady is a manufacturer and marketer of so-called "complete" solutions which are used to identify and protect people, products and places. The company has been around for a long period of time, in fact it has been around for more than a century.
The identification solutions segment is responsible for the majority of sales, while posting the highest margins as well, with products to think of including safety & facility ID, wire ID and other related products. The company has a small workplace safety business, although the revenues and profits generated from selling signs, tags, labels and safety equipment are not that important.
The company posted a 6% increase in 2021 sales to $1.14 billion, with operating earnings up 21% to $167 million. Net earnings of $130 million translated into earnings of $2.46 per share, with adjusted earnings posted as high as $2.65 per share. The company operated with a net cash position of around a hundred million at the time, to acquire Magicard in a $59 million deal and buy the Code Corporation in a $173 million deal as well.
With the company guiding for adjusted earnings to rise to $3.22 per share in 2022, on the back of organic growth and dealmaking, valuations looked reasonable. The company saw a 16% increase in first quarter sales, almost half driven by organic sales growth, as the organic performance metric improved to 13% in the second quarter.
Organic sales were up 9% in the third quarter, albeit that reported growth slowed down amidst lapsing of M&A activity and the stronger dollar. This was quite comforting, as Brady's long-term performance has been a bit stagnant, with the company not delivering upon such solid organic growth rates in recent years.
With the company ending up posting a 14% increase in 2022 sales to $1.30 billion, with adjusted earnings posted at $3.15 per share, I was impressed with the 2023 guidance, which called for earnings between $3.30 and $3.60 per share, amidst an uneven and uncertain environment. With shares trading at $48 per share in the fall, the resulting 14 times multiple looked compelling, as the company has returned to a net cash position again.
Doing Well
Since November, Brady Corporation shares have risen in a steady fashion to nearly $55 per share here, as part of the re-rating came through. In December, Brady announced a small restructuring of the business, or better said new organizational structure. Instead of posting the result for the identification solutions business and the workplace safety business, results will be reported on the back of geographic segmentation from the third quarter onwards.
This came despite the fact that Brady Corporation only posted a 3% increase in second quarter sales for the fiscal year 2023. A strong dollar hurt sales growth quite a bit, with organic sales growth up in excess of 6%. The company hiked the midpoint of the earnings guidance by five cents to $3.50 per share following the solid results, as continued buybacks reduced the share count to 50 million shares, while the company maintained a net cash position of $31 million here.
Basically, the 15% move higher in the time span of a quarter has been almost entirely the result of the re-rating of the shares, although a 14 times multiple has only risen to 16 times here, as Brady Corporation continues to do fine. In the meantime, it continues to operate with a net cash position, giving it plenty of firepower for continued buybacks and bolt-on dealmaking.
Given all this, I am mindful of the run higher, and while I do not expect Brady Corporation shares to quickly command a (near) 20 times earnings multiple, shares might run to the $60 mark, levels at which I would consider trimming part of my position. On the other hand, I feel no rush given the solid momentum, in combination with still very reasonable expectations for Brady Corporation.
For further details see:
Brady - Still A Safe Place