Investor Essentials Daily

This cash management firm has has been minting steady cash flows

The Brink's Company (BCO)
December 24, 2020

Cash management has long been a vital process for businesses. After making money, businesses must keep track of all the cash they receive from customers to avoid fraud or theft.

Today’s company is one of the most famous cash management companies on the planet and is also known for its armored trucks.

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

Investor Essentials Daily:
Thursday Tearsheets
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For many households, it’s the pinnacle of the holiday season, with decorations, festive music, and even holiday movies in full swing.

For many millennials, the Home Alone series is a perennial staple.

While it’s easy to argue over which of the first two films in the series is better, almost nobody can deny that one of the iconic scenes in Home Alone 2 is when Kevin saves the day by throwing a rock through the window of the toy shop. This prevents the Sticky Bandits from stealing the money that was supposed to go to charity the next day.

Ironically, if the owner of the store had proper cash management, this never would have happened. Protecting cash as a business is so essential that companies pay big money to do so.

One of the most well known companies to do this is The Brink’s Company (BCO). Brink’s is a private security and protection company serving customers in over 100 countries.

The firm is known for its armored trucks that carry money and valuable goods. Brink’s helps protect banks, retailers, jewelers, and even governments.

Brink’s has also been acquiring smaller security companies to grow its footprint. In other words, the firm is consolidating the security industry

One might expect a company providing a necessity like security to be making premium returns, but it appears this has not been the case. Looking at the firm’s as-reported returns, Brink’s looks like a cost-of-capital business.

As-reported return on assets (ROA) was just 4% in 2019. Additionally, as-reported ROA has fallen the past three years, from 6% to 4%.

It appears as though Brink’s has been unable to distinguish itself in the security business. Additionally, the firm’s acquisitions have not been accretive to returns.

However, this picture of Brink’s performance is not accurate. This is due to distortions in as-reported accounting. These include the treatment of goodwill and other distortions. Wall Street has missed Brink’s profitability.

Brink’s Uniform ROA has been nearly double as-reported metrics over the last three years. Uniform ROA was 9% in 2019, compared to 4% for as-reported ROA. More importantly, while as-reported ROA has fallen the past three years, Uniform ROA has held steady at 9%.

Brink’s has managed to create a strong brand in the security space, and has successfully rolled up smaller players in the industry.

Without Uniform Accounting, investors would miss the strong returns of this security provider. They might see Brink’s as a firm with cost-of-capital profitability, wasting its capital on fruitless acquisitions.

Ultimately, Brink’s has managed to make itself essential to those looking to protect cash. These solid returns highlight the value of cash management to organizations around the world.

SUMMARY and The Brink’s Company Tearsheet

As the Uniform Accounting tearsheet for The Brink’s Company (BCO:USA) highlights, the Uniform P/E trades at 21.7x, which is around the global corporate average valuation levels, but below its historical average valuations.

Moderate P/Es require moderate EPS growth to sustain them. In the case of Brink’s, the company has recently shown a 12% Uniform EPS decline.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Brink’s Wall Street analyst-driven forecast is a 56% EPS growth in 2020 and 7% EPS decline in 2021.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Brink’s $69 stock price. These are often referred to as market embedded expectations.

The company would need to grow its Uniform earnings by 8% per year over the next three years to justify current stock prices. What Wall Street analysts expect for Brink’s earnings growth is above what the current stock market valuation requires in 2020, but below its requirement in 2021.

Furthermore, the company’s earning power is in line with the corporate average. Also, cash flows and cash on hand are above its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low credit and dividend risk.

To conclude, Brink’s Uniform earnings growth is above its peer averages, while their valuations are traded in line with its average peers.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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