It looks as though shareholders at Brady (NYSE:BRC) can count on another happy holiday. The maker of labels, safety signs, die-cut materials, and identification markers posted record first-quarter revenues and earnings. Sales for the quarter came in at $232.6 million, compared to $200.4 million last year -- a 16% increase. Profits grew to $30.2 million, or $0.60 per share, versus $20.4 million, or $0.41 per share, last year.
You wouldn't normally think that making an exit sign or a valve marker or the faceplate on a phone would be a particularly profitable business, let alone an exciting one in which to invest. You'd be wrong. Investing legend Peter Lynch suggested that those types of boring, mundane businesses make some of your best investments, since many investors overlook their potential.
Brady's performance is the marriage of strong 10% domestic growth coupled with superb growth in its international business segment. That was particularly true in Asia, which saw greater than 32% growth and which now accounts for 18% of all its sales -- up from 15% last year. Just like the company's television namesake, it has joined two seemingly opposite families of business -- organic lines and acquisitions -- into a single harmonious unit. Base growth -- its organic business -- grew 7%, while acquisitions added 8% to the mix.
There's a cautionary tale in here as well, however. Brady has been on a tear lately, making numerous acquisitions. In the first quarter alone, the company bought up four others and says it has a "robust" line of other candidates going forward. Such acquisitions make apples-to-apples comparisons between periods a little more difficult, and they can lead to a case of corporate indigestion as the company tries to digest these new businesses.
That's been the case with sporting goods manufacturer K2 (NYSE:KTO), which has apparently become bloated from a steady diet of acquisitions. Trying to roll up an industry becomes ever more difficult and expensive. We see that even Brady's debt has grown 7% since July, although it should be noted it has been relatively constant for much of the past year.
While the quarterly 16% sales growth is respectable, it's 50% lower than the rate of growth Brady reported last year when sales jumped from $152 million to $200 million. Such a fall-off in growth rates, even as sales increase in absolute terms, generally signals a warning flag for me. When I looked at Inter Parfums (NASDAQ:IPAR) last year, that was one of the signs that preceded the stock's subsequent decline. Management has raised guidance for the rest of the year, estimating it will realize $920 million in revenues, up from $880 million it had previously guided toward. Net income is expected to come in 10% higher than previously thought. If Brady hits those targets, that would be a 12.7% increase in sales for the year, a somewhat slower pace than the 21.6% jump it saw the year before.
As the company trades at a relatively rich enterprise value-to-free cash flow ratio of 22, the company's price of $37 a share is not particularly cheap right now. With the second quarter usually being a slower time for this company, investors may be able to pick up better-priced shares soon. In the meantime, and thanks to its increased dividend, current shareholders can still enjoy a very Brady Christmas.
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Fool contributor Rich Duprey owns shares of K2 but does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
