There was more rip-saw action on global stockmarkets last week as news on interest-rate cuts was offset by an awful US jobs report. President-elect Barack Obama’s promise of a massive infrastructure spending package has improved sentiment, but until we have more details, I’d advise cautious investors to stick to cheap, defensive stocks that have been unfairly sold off in the recent upheaval.
Brinks Company Inc (NYSE:BCO), rated a BUY by Jeffries
One example is the security sector. We are likely to see a rise in crime as economic conditions get much tougher. This is where Brinks comes in. It was founded in 1859 and rose to prominence in 1983 when it fell victim to Britain’s largest-ever heist: six armed robbers stole 6,800 gold bars worth £25m from a warehouse at London’s Heathrow Airport. But 25 years on, Brinks is in fine fettle and has delivered impressive 13%-a-year, top-line growth since 2003.
In fact it is now the world’s largest operator of armoured transportation, security personnel and services delivering cash/valuables to banks, retailers and government organisations. It competes against the likes of G4S and Securitas, and has around a 17% share of the $14bn global secure logistics market, generating operating margins of more than 6%.
Not surprisingly, given the deteriorating economic climate, demand for its services is strong. For example, the annual global cost of shrinkage (shoplifting and employee theft) to retailers has risen to an estimated $105bn globally. With stores slashing jobs, there are now far fewer staff to deter thieves. What’s more, insurance companies love security guards, and will typically charge lower premiums for firms that employ them.
Separately, in November, Brinks demerged its residential home security division, while also selling its coal assets to Massey Energy. That means it is now entirely focused on its core business. This should improve decision-making, but on top of this, it could also result in an opportunistic takeover bid. And at these depressed levels, I would not be too surprised if the group’s two activist investors – MMI Investments and Steel Partners II – were also pushing for a value-boosting deal. Wall Street expects 2009 revenues and underlying earnings per share (EPS) to come in at $3.3bn and $2.15 respectively. At around $23.30, the stock trades on an undemanding p/e ratio of 10.8 and on a paltry multiple of 3.1 times enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation), which represents a substantial discount to its main rivals.
Before getting carried away, what are the hazards? Sterling investors should factor in foreign currency moves. The company is also exposed to the usual pitfalls associated with bidding and running government contracts.
That said, demand is set to rise despite the headwinds of a poor macro environment and a stronger dollar (69% of sales are outside the US). As such, with a net $40m in cash and an excellent franchise, along with the benefits from a falling oil price (for example, lower fuel costs), Brinks looksa steal for the prudent investor.
Recommendation: BUY at $23.35(market capitalisation $1.1bn)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.