Thursday, April 23, 2009

Brinks Co: Riding Shotgun with the Cash

Fair Value Estimate: $55
Strategy: Sell June 2009 puts strike $30 for $2
Result: Puts end in the money, receive BCO shares at net cost of $28/share. Not in the money you receive $2 in cash.

Brink's is a staple name in the cash transportation business a generates cash flow with as much security as it does transporting it. With over $3 billion in revenues, it leads the pack of its competition - the next nearest competitor has revenues of about less than $500 million. That's a 6x advantage folks and is one of the few times you'll see a niche market structured so. Leveraging their brand name, Brink's is expanding internationally with solid success. Look for increased cash flows as operations abroad gain scale due to growing international economy, the greater need for secure transport for valuables, and expanding brand recognition.

About 2/3 of revenues comes from international operations vs. about 1/3 from the United States. Barriers to entry are significant as this business requires training personnel and having a solid back office system to track and secure the goods they are transporting. Operating profit in 2008 for their USA business has dropped - perhaps as a result of the billions of dollars that has evaporated out of the US financial system. Regardless this business will really depend on international growth as margins for those operations have held up pretty well and accounting for over 75% of operating profit.

Brink's is in solid financial condition with a only a $20 million dollar net debt position on its balance sheet. At $30 a share, Brink's market cap is equal to about $1.4 billion. It earned in net income (NI) of about $180 million. That's a Enterprise Value to NI ratio of less than 10x.

Now keep in mind that revenues were hugely impacted by a stronger dollar - to the tune of about $60 million which would have likely been passed down to the income statement at around $50 million. It would be safe to assume that $25 million of these currency losses will be recouped going forward and that adjusted NI should actually be $280 million!

However, I prefer to look at cash flows. Considering that Brink's is a growing organization and should naturally have increasing working capital, I prefer to just add back depreciation and amortization to get Operating Cash Flows. I'll adjust NI down to $250 million and D&A looks pretty stable at $120 million going forward. Operationg cash flow = 250+120 = $370 million.

Next up is Capital Expenditures (Capex). Capex is a tricky little number since often times it includes expenditures made for ongoing operations as well as growth operations. If you're going to calculate growth somehow in your model - it will probably be appropriate to include the whole Capex number. For my sake, I just want to know what is spent in maintenance capex. That number comes in around $120 million (4thQ conference call 2009, 70% of capex for maintenance). This is fantastic fiscal management and please allow me to explain. If maintenance capex is what you need to maintain your level of operations, depreciation is the lost value of your operating assets. A solid business should not have to invest more capex into the declining value of operating assets to maintain its level of business! Ideally we would like maintenance capex below depreciation, but for a more capital intensive business like Brink's (need a strong fleet of armored trucks) this is solid.

Free cash flow is now projected to be at $370 - $120 = $250 million! Enterprise Value to FCF is only about 5.5x, excluding any projections of growth! This number should really be around 10x which would value BCO shares at $55.

Going one step further you can calculate ROIC. You can find Invested Capital by adding cash and short term liabilities (I usually subtract out short-term debt), followed by subtracting the result from total assets. My Invested Capital comes in to be around $1.65 billion. Dividing $250 by $1650, and my resulting ROIC is 15%.

Furthermore, if you wanted to project out a complete growth model, I'd take the 30% in expansion capex times the ROIC, which equals a growth rate of 4.5%. Compounding growth for 5 years, my model estimates a potential price of $70/share for a compounded return of 18.5% a year. Remember these numbers are conservative! An increase in capex can substantially increase growth and fair value!


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