Fintech, the practice of incorporating new and innovative technologies to better perform traditional financial services, continues its march on traditional banking and the world's economy. The movement's onward march, at least partly inspired by the world's very real shift from cash to digital payments, is what makes Brink's Company (NYSE:BCO) something of an anomaly.
The 158-year-old company has grown from a one-wagon operation that transported valuables from Chicago train stations to visitors' hotels into a global cash management solutions powerhouse. It now performs tasks like transporting cash in armored trucks, replenishing and maintaining ATMs, and offering cash management and dispensing services.
Given what the company does and the macro headwinds it faces, you could be excused for thinking Brink's is a dying company, on par with the iconic retail stores that are slowly decaying in empty malls around the country. But you would be wrong. In fact, Brink's stock price has crushed the market this year, returning 88% year to date and 99% over the past 12 months. The stock's incredible performance has followed the company's improving fundamentals. In the company's recently reported third quarter, its revenues grew to $850 million, a 12% year-over-year increase, and its non-GAAP earnings per share rose to $0.83, a 22% increase year over year.
Since taking over the company in June 2016, new CEO Doug Pertz has engineered a remarkable turnaround for the company and deserves a lot of credit for implementing moves that have spurred growth. Let's take a closer look at two catalysts -- and one growing concern -- that investors should watch going forward.
Growth via acquisition
The new Brink's management has specifically stated that it wants to grow through accretive acquisitions within its core competencies. In the company's third-quarter conference call, transcribed by S&P Global Market Intelligence, Pertz explained the company's "inorganic" growth strategy:
With our organic initiatives gaining traction, we're just beginning to layer in growth through acquisitions in our core lines of business. Our inorganic strategy, dubbed 1.5, focus[es] on acquisitions in our core businesses and in our core geographies. ... We have a strong pipeline of core acquisition targets that offer new opportunities to increase route density and new customers and capture cost synergies with strong returns. This year ... our five completed acquisitions to date added $40 million of revenue, $7 million of operating profit, and $0.07 per share in the third quarter.
The contributions should be even greater in the fourth quarter, as some acquisitions were just completed during the third quarter. These acquisitions do not include Temis, a cash transportation service in France, that is expected to close before the end of the year. True to form, Brink's expects to find cost and customer synergies through the Temis deal.
Growth through margin improvements
This quarter, Brink's operating margin improved 60 basis points to 9.2%, and adjusted EBITDA margin increased 80 basis points to 13.5%. That was not by accident. Brink's management has methodically combed through Brink's costs and operating margins looking for areas to improve upon since Pertz's hiring.
One area Brink's has highlighted is its newly designed armored trucks that feature a separable body and chassis. In previous conference calls, Brink's management stated that these trucks would be able to be replaced at 40% of the cost of existing trucks. Brink's has also reduced its crew size in Ontario, its largest Canadian market, to two-person crews and, in Mexico, to three-person crews. This is what local competitors in each of these regions use and will allow Brink's to better compete. The company also raised prices significantly in "key markets" to offset wage increases.
Growth through debt?
While Brink's acquisitions are immediately accretive and should ease long-term competitive concerns, they also cost money. The company's debt increased to $570 million this quarter, a 131% increase since the end of 2016. The majority of this debt comes from the company's acquisitions, which management has no plans to stop anytime soon.
Obviously, this kind of debt cannot continue into perpetuity, but management believes it can maintain a financial leverage ratio, net debt divided by the trailing 12 months of EBITDA, of about 1.3. CFO Ronald Domanico also added that Brink's recently "completed a comprehensive debt refinancing with attractive rates, extended maturities and investment-grade covenants" which will expand the company's capacity to make "disciplined and accretive acquisitions."
On the brink('s) of disaster? Not even close
While I am weary of growth-through-debt strategies, I do understand what Brink's is trying to accomplish through its many acquisitions. After all, this isn't a story of an industrial conglomerate making acquisitions for the purpose of empire-building. Instead, investors have an industrial leader making smart attempts to consolidate a fractured market. With interest rates low, this is the ideal time for such a strategy. Yes, the company's debt levels and leverage ratio should certainly be monitored. But investors will probably continue to experience market-beating returns in the years ahead if the company can continue to reap cost synergies and improving margins in immediately accretive acquisitions.