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Armed Guards at My Front Door

George C. Fisher

 For almost a decade, I owned an U.S. export management services and inter-Asian trading company. Starting in the late 1980s, my travels took me extensively throughout Southeast Asia. I had the opportunity to meet many interesting business folk, a few of which remain good friends. One of these interesting folk was an ex-patriot living in southern Thailand . He managed a network of business interests, including a substantial jewelry manufacturing company. In one of my trading activities with him, I was offered as payment for my services 845 carats of industrial grade, cut, semi-precious, red ruby stones from the Thai Chanthaburi-Trat and Burmese Magok gem fields. One potential difficulty with accepting this intriguing and untraditional currency was how to transport my payment back to the US . Thailand was in the middle of my itinerary and I was not looking forward to explaining to customs officers at my pending stops in Cambodia , the Philippines , Taiwan , and Korea how I came upon 845 carats of deep red rubies. My friend then sweetened the offer by including the rubies in his next shipment of jewelry to the US, delivering them to my front door.

A few weeks after my return to the US , a Brink’s armored truck drove up to my house. My friend had the rubies picked up in Thailand and transported to my house in one seamless transaction, including international customs clearing. Just like they do at the banks, two Brink’s guards, in their full security gear, walked up my front steps, rang the door bell, and delivered my rubies. It was the buzz of the neighborhood for some time thereafter.

This was my first personal encounter with the Brink’s Company (BCO $35). Founded as an armored trucking firm in 1859 by Mr. Perry Brink, BCO has been transforming itself over the past few years. During the heyday of building mega-businesses, Brink’s Company expanded into other security related fields, and merged into a natural resources firm with assets in coal, timber, natural gas and gold. Following the mid-90s fad of issuing tracking stock for different operating units, Brink’s Co. became part of a three class stock offering of the Pittston Brink’s Group. However, the coal business developed long-term medical liability issues that nearly sank the company in the late 1990s. From 2000 to 2003, management reworked the company, selling all natural resource assets, settling long-term liability issues, and focusing its attention on the commercial and personal protection business. After a few years of restructuring, it seems management has rediscovered its growth platforms – security and international markets.

Today, BCO is a fascinating mix of businesses operating in three groups: Brink’s Int’l, Brink’s Home Security, and BAX Global. Revenues in 2004 totaled $4.7 billion, an increase of 18 percent over 2003. Operating profit in 2004 totaled $282 million. Standard and Poor’s is anticipating companywide revenue growth this year to be in the 6 to 8 percent range. Earnings per share (from continuing operations) should rise from $1.82 in 2004 to around $2.11 in 2005 and between $2.20 and $2.30 in 2006. Long-term, Wall Street analysts are expecting a moderate 15 percent earnings growth.

The Brink’s Int’l operating group offers traditional armored car services, along with bank automatic teller machines services, secure air transport of valuables, and foreign currency deposit processing. Brink’s Int’l generated $1.9 billion in revenues and 51 percent of overall company operating profits. Brink’s Home Security operating group supplies mainly residential security and fire alarm systems. Home Security monitored around 921,000 systems last year, representing 18 percent growth over the previous year. While generating a relatively small $330 million, or 7 percent of total revenues, the Home Security group chipped in a substantial 29 percent of total operating profits, thanks to a hefty 23 percent operating profit margin. BAX Global operating group is a multi-model, international transportation and supply chain management provider, focused on the business to business, heavy freight market. Management performance at BAX Global has been spotty over the past few years, albeit in difficult market conditionings. In 2004, BAX Global represented 52 percent of company revenues, or about $2.4 billion, but only 20 percent of operating profits.

The growth platforms for Brink’s Company are the home security and the armored car groups. While the number of customers seeking home monitoring services experienced a sizzling expansion in 2004, client growth rates will probably taper off this year and next. Brink’s Home Security is the second largest US residential alarm services company. Not only is new subscriber growth critical to overall performance, retaining new clients is equally important. Brink’s Home Security’s disconnect rate has trended downward over the past few years, demonstrating improved client satisfaction. Operating profit margins in 2004 for the Home Security group were an attractive 23 percent, compared to 7 percent for the armored car group and 2 percent for BAX Global. The residential alarm monitoring service industry is highly fragmented and enjoys less than a 30 percent overall market penetration. This should allow Brink’s to gain additional clients through higher overall market penetration, increased market share, and timely acquisitions.

The transportation of cash around the globe remains a profitable service with growth potential. Banks, retailers and financial institutions are seeking to outsource more of their cash processing needs. With higher security concerns and growing demands for more convenient ATMs, financial institutions continue to expand their cash processing expenditure budgets. As a leader in the outsourcing of cash processing, Brink’s Int’l should continue to enjoy steady growth in revenues and profits. While operating profit margins are not very exciting, the consistent cash flow should grab investor’s attention.

Brink’s Company is uniquely positioned in the international market. Operating in over 50 countries, BCO has developed a significant international network in the cash processing and freight industries. Management is expecting additional long-term growth across its operating groups as a direct result of its leading brand recognition in fast growing, overseas markets, such as Asia. The following table outlines the extent of BCO’s international business, by 2004 group revenues and 2004 operating group profit, with one year corresponding growth rates in ( ):

Business
2004 Revenues 2004 Operating Profit
  Percent
Americas
Percent
International
Percent
Americas
Percent
International
Brink’s Int’l 38% (2%) 62% (23%) 42% (3%) 57% (51%)
Home Security 100% 0% 100% 0%
BAX Global 46% (19%) 54% (24%) 27% (NA) 73% (13%)

Brink’s Company generated almost 54 percent of total 2004 company revenues and 46 percent of total 2004 operating profit outside the Americas . In addition, international business has provided the company with increasing profitability. For example, in 2004, Brink’s Int’l armored car group grew by 2 percent in revenues and 3 percent in profits in the Americas , while the same international business grew by 23 percent and 51 percent respectively.

I believe the potential for substantial international expansion is an attribute overlooked by many potential investors. Secure cash transportation, home security monitoring, and safe valuable transportation services are a growth platform worldwide

Brink’s Company is not without problems. BAX Global has been an underperforming asset for a number of years. While BAX Global represents a substantial percentage of overall revenues, the group has been unable to consistently contribute in profits. Some company followers believe non-security related BAX Global assets could be sold, further downsizing the company, and the capital reinvested in other growth platforms.

In addition, as settlement of litigation concerning medical liability issues arising from its divested coal mining businesses, Brink’s Company agreed to fund a benefit’s trust. Management has targeted to contribute $300 to $400 million into the trust. Known as its “Legacy Liability”, Brink’s Company has already contributed $132 million over the past two years, and anticipates contributing between $30 and $50 million a year over the next five years. This diversion of company operating cash flow will impair potential earnings growth going forward, but its impact will diminish over time.

I own 200 shares of Brink’s, purchased in January 2004, the same time as the company was added to the MoneySaver Overlooked Stock Portfolio. The stock price is up 58 percent since its addition, for a 39 percent annualized gain. BCO appears to be in a holding pattern since last November, trading between $32 and $38, or around a forward PEG ratio of 1.00 to 1.10.

In my opinion, while not particularly undervalued at its current stock price, Brink’s Company provides a unique long-term, international opportunity worthy of most investor’s further investigation. Patient investors with realistic expectations should be amply rewarded as Brink’s Company expands its security and international growth platforms.

George C. Fisher is a 30-year veteran in DSP/DRIP investing. He is author of All About DRIPs and DSPs (McGraw Hill, 2001) and The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002). Mr. Fisher is an avid dividend reinvestment advocate and utilizes the strategy with all dividend paying stocks, both at the broker and direct with the companies using their DRIP programs.