Brady Buys a Bunch
By Michael Goode
September 14, 2007
Given the revenue growth in Brady's (NYSE: BRC) fourth quarter, an unwary investor could be duped into thinking that this is an amazing growth company. The industrial conglomerate, which makes everything from signs to cell phone parts, saw its revenue increase 26% year over year. But a closer look reveals a very different story.
Acquisitions accounted for a 17 percentage points of that increase in revenue, with currency adjustments contributing another four. Organic growth -- the growth in sales from operations the company did not buy over the last year -- only totaled 5%. That's about what investors should expect for Brady; over the last five years, its organic growth has averaged 4.6% per year.
In addition, restructuring charges of $5.4 million hurt the company's bottom line. Despite those expenses, net income increased 17%. Restructuring charges may or may not recur in the future, as the company closes plants, opens new ones, and lays off workers. While restructuring charges were negligible in 2005 and 2006, they were far more significant in 2003 and 2004. The frequency with which Brady has taken such charges leads me to expect more of them in the future.
Still, the restructuring seems to be helping Brady. Selling, general, and administrative expenses (SG&A) fell from 39.6% of sales in 2003 to 33% of sales in 2007. Despite these improvements, however, Brady's manufacturing costs have risen (mostly because of higher raw material prices), and its 12.6% operating margin for 2007 considerably trailed the 15% margins it enjoyed in 2005 and 2006.
Not every company can generate great organic growth. There's room on Wall Street for slow growers, and for companies that grow intelligently by acquiring and improving other firms. Illinois Tool Works (NYSE: ITW) has made a name for itself by buying all sorts of industrial companies, and then fattening their margins. Brady would do well to emulate that firm, and concentrate more on plumping up profits at its own acquisitions.
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