Brinks Company Inc (NYSE: BCO), rated a BUY by Davenport
British naval captain Sir Francis Drake, who helped defeat the Spanish Armada, was also expert at plundering enormous quantities of precious metals from Spanish treasure ships anchored off the coast of south and central America. Much of this gold and silver resides in vaults under the Bank of England. Yet some of it is now returning home. In July, Hugo Chávez, Venezuela’s president, instructed that all the country’s foreign gold reserves be brought back to Caracas. Venezuela is the world’s 16th-largest holder of gold with 211 tons (worth $12bn) of bullion located overseas. Such a transfer will need top-notch security.
That’s great news for the likes of Brinks. As the world’s largest secure logistics provider, it has a 21% share of the $14bn market, generating operating margins of over 6.5%. Along with G4S it dominates the bullion transport industry. Better still, Brinks operates its own vaults, where the price of storing gold is rising rapidly due to the high demand for the yellow metal and lack of suitable space.
The firm offers cash logistics and other services to financial institutions, retailers, governments and jewellers. These include running a fleet of cash-in-transit armoured cars, replenishing cash machines, providing guards, and destroying sensitive information. There are significant barriers to entry in the industry due to the importance of a trusted brand, training requirements for personnel and the need to have sophisticated back-office functions that can track valuable property on the road.
No wonder demand is robust, with 2011 organic top-line growth expected to be in the mid-to-high single-digit percentage range. That’s before the benefits of another wave of quantitative easing, which could create truck loads more fiat currency to protect.
Wall Street is anticipating 2011 revenues and earnings per share (EPS) of $3.8bn and $1.86 respectively, rising to $4.1bn and $2.21 in 2012. Given this, I would rate the group on a ten-times through cycle EBITA multiple. After deducting net debt of $273m and $418m in retirement and other legacy costs, that produces an intrinsic worth of $35 a share.
British investors should factor in foreign-currency moves and the group is also exposed to the usual pitfalls associated with bidding and running government contracts.
That said, demand, according to chief executive Michael Dan, is set to rise thanks to the “surging global movement of bank notes and precious metals”. Davenport has a price target of $38, with third-quarter results expected towards the end of October.
Rating: BUY at $24 (market capitalisation $1.2bn)