Founded in 1859 by Perry Brink to transport valuables around Chicago, Brink's Company (NYSE:BCO) is now a cash-management solutions powerhouse, with almost 12,000 trucks on the streets safely transporting cash and valuables for customers in 41 countries. At a time when cash transactions are slowly declining and most of the financial-technology world is trying to find ways to digitize currency, Brink's continues to make steady profits by providing operations such as transporting cash in armored trucks, maintaining and funding ATMs, and offering cash-management and dispensing services.
In the company's recently reported fourth quarter, revenue rose to $903 million, a 12% increase year over year, while non-GAAP earnings per share grew to $0.95, an 8% increase year over year. The EPS results included a theft of $11 million in December, which impacted EPS by about $0.14.
|Metric||Q4 2017||Q4 2016||Change|
|Revenue||$903 million||$804 million||12%|
|Earnings per share (non-GAAP)||$0.95||$0.88||8%|
|Total debt||$612 million||$247 million||148%|
The company is growing by continually scanning a fragmented market looking for acquisition targets that will be accretive to earnings almost immediately upon purchase. The strategy has worked well over the past year, as shares are up more than 41%, even after the recent decline. Yet cracks in the company's armor are beginning to show. Debt continues to march upward while earnings growth is slowing.
Is Brink's Company pursuing the right strategy? Let's take a closer look at the company's plan for growth to determine whether the company is making smart choices with its use of cash flow.
Growth through acquisitions
In 2017, Brink's Company spent $365 million on a total of six acquisitions; this past January, it announced its acquisition of Rodoban, a Brazil-based cash-managing company, for $145 million. And CEO Douglas Pertz's comments on the company's latest conference call, transcribed by S&P Global Market Intelligence, suggest Brink's is hardly finished targeting smaller acquisitions:
Our acquisition growth plans or what we call Strategy 1.5 put a high priority on acquisitions in our core businesses and in our core geographies -- our current geographies that we're in, with the second priority on core business acquisitions in adjacent geographies. We have a strong pipeline of core acquisition targets that offer new opportunities to increase route density, add new customers and capture cross synergies with attractive margins.
The recent Rodoban acquisition is a perfect example of what Brink's looks for in its targets. Rodoban's cash-management services align neatly with Brink's core competencies, while its geographic footprint, southeastern Brazil, overlaps with Brink's South American operations. The acquisition also adds route density and new customers, which implies Brink's management is probably correct that the company will be able to capture meaningful synergies in the near future.
But at what cost?
Unfortunately, this is a costly method of funding growth. At the end of the 2017 calendar year, Brink's net debt level had risen to $612 million, a 148% increase year over year. The incredible rise was "due primarily to the acquisitions completed in 2017." Brink's currently has $1.4 billion in available credit, and management doesn't sound shy about using it. Pertz added:
[Our] new debt structure and capacity also provide great flexibility should larger core acquisition become available that would add significant value through synergy capture or entering into higher growth markets, or if we see opportunities for businesses that are complementary to our core cash business that support our overall strategy and accelerate value growth. Our focus on strategy is to accelerate growth and profitability by servicing the total cash ecosystem.
Last quarter, management stated it believed it could maintain a financial leverage ratio, net debt divided by the trailing 12 months of EBITDA, of about 1.3; this quarter, the company's financial leverage ratio reached 1.4. Brink's expects 2018 net interest expenses to come in at about $50 million, a decent chunk of change for a company that is giving $525 million as the midpoint of its adjusted EBITDA guidance for 2018.
On the brink of disaster?
Investors will need to keep a close eye on the company's debt levels. The financial leverage ratio is already higher than the company's stated goal. If it continues to creep higher in the quarters ahead, current shareholders might find it's time to walk away. Money the company pays out in interest rates is another important metric to watch closely. At $50 million for 2018, it's almost 10% of the company's guidance for adjusted EBITDA this coming year.
As concerning as the rising debt levels are, Brink's Company seems to be precariously balanced between growing via acquisitions in a responsible manner and being buried under too much debt. If Brink's keeps targeting smaller companies that serve in the same areas performing the same tasks as it already does, and brings customers along the same basic routes it already travels, the company should recognize cost synergies. That's not a bad strategy, given that the cash-management industry's best days are undoubtedly behind it. Brink's just needs to be careful to add acquisitions where the cost synergies will be real, and not just exist in the board's imagination. If it can maintain that balance, however, it might continue to give shareholders returns that beat the market.