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The Brink's Company Message Board

  • rtcrawfordiii rtcrawfordiii Sep 25, 2007 8:38 PM Flag

    BCO Vaule Stock Case

    BCO has a five-year growth rate of Owner's Earnings (Net Income minus Depreciation and Amortization and Capital Expenditures) of 51 percent. This calculation eliminates many problems with tracking earnings, alone, and is the measure used by Buffett. A conservative forward estimate of a 25 percent reduction would put that growth rate at 31 percent, so estimating growth of just 10 percent for the next decade and 5 percent for the following five years is hyper conservative. Apply present value factors, sum the present value factors, add the continuing value beyond the next 15 years and subtract debt, and you have the intrinsic value of the stock. Here are the figures:

    Year OE Est PV OE Est
    2007.00 10.39 9.10
    2008.00 11.43 8.77
    2009.00 12.57 8.45
    2010.00 13.83 8.15
    2011.00 15.21 7.85
    2012.00 16.73 7.57
    2013.00 18.40 7.30
    2014.00 20.24 7.03
    2015.00 22.27 6.78
    2016.00 24.50 6.53
    2017.00 25.72 6.01
    2018.00 27.01 5.53
    2019.00 28.36 5.09
    2020.00 29.77 4.68
    2021.00 31.26 4.30
    Cont Val 3.72
    - Debt/Shr 3.40

    Today's closing price of $54.05 is laughingly low compared to the company's intrinsic value per share of nearly double that figure.

    This should not imply that all is great with the company, however. The earnings volatility is at 32 percent for the same period, which explains the volatility of the stock. But volatility is a good thing if the trend and aggregate results are sustainable and positive (and they are for Owner's Earnings, Book Value, and Shareholder's Equity, with Owner's Earnings exceeding the 10-year three-standard-deviation level for the prior five years). It is volatility that causes a stock to be undervalued (or, if shorting, overvalued), and this is the source of investor profits if pursuing a value approach. Buy low and sell high works, but the stock has to be valued low in order to buy it at those levels ... and volatility in trivial respects is the genesis of low stock prices.

    The second negative is Pirate, whose name should say it all when it comes to their devotion to growing the firm. Keep in mind that if you cut an adult in half, you have two children. Pirate has demanded that BCO split off the Brink's trucking/security business from the home security business. It is hard to achieve operational synergies and cost savings by doubling the non-value-added administrative necessities of HR, marketing, accounting, etc. Pirate is, evidently, seeking a quick benefit from a move that would undermine the firm's future prosperity. If you are a trader, rather than an investor, the split makes sense. Would you, however, want your employer to manage based on such a short-term perspective? If so, update your resume. Pirate's argument is akin to advocating managerial incompetence -- harming the firm to achieve short-term benefits, rather than exercising patience and reaping significantly larger gains over time.

    Ultimately, the compounded growth expectation for BCO over the next decade (in light of the disparity between the current price, its intrinsic value, and a 10 percent growth rate for the decade) is 21.15 percent per year, according to my calculations. This is nearly double the norm for the market. The prudent investor need only leave leadership of the firm to an evidently competent management and stop living and dieing by the day-to-day movement of the market. As Buffett has famously said, the market is a beauty contest over the short term and a weighing machine over the long term. Like a teenager's negative critique of his or her parents, it is far easier for Pirate to criticize BCO than to manage BCO.

    Finally, I have no current or prior connection to BCO other than a $1,000 investment. During college, however, I was a night security guard at the UGA Alpha Delta Pi sorority house, working for a small company in Athens, GA. Today I teach management to current and future health care administrators.

32.79+0.78(+2.44%)May 6 4:01 PMEDT