Wasan Tita
Wasan Tita
In August of last year, I believed that shares of Brady Corporation (NYSE:BRC), the ID solutions provider, looked a lot safer again. The manufacturer and marketer of complete identification and protection solutions traded at non-compelling multiples, although its track record was not too convincing.
Ever since, shares have risen some 20%, driven by a partial re-rating as Brady has improved margins amidst very modest organic growth. The improved earnings have driven shares higher, as a recent acquisition could be a major driver for 2025.
Brady Corporation is a manufacturer and marketer of "complete" solutions, used to identify and protect people, products, and places, something which it has done for over a century.
The company reports its results across two segments, of which the identification solutions segment is the biggest. This unit provides safety & facility IDs, wire IDs, and related products, as this unit is responsible for the majority of sales (while carrying the highest margins as well). These activities are complemented by a smaller workplace safety business, with activities relating to manufacturing and selling of signs, tags, printers, labels, and similar products.
The company generated a total of $1.30 billion in sales in 2022 on which it reported adjusted earnings of $3.15 per share, while guiding for earnings between $3.30 and $3.60 per share in 2023. With shares trading at $50 in the summer, a mid-teens multiple looked quite compelling, also given the modest net cash position held by the firm.
There was a caveat, however, as the company has seen a mediocre long-term performance. In the decade leading up to 2022, sales have been largely flat around $1.2-$1.3 billion, although operating margins improved with the passage of time, being complemented by very modest buybacks.
Despite the mediocre long-term performance, it was a near 7% earnings yield and unleveraged balance sheet which made that the risk-reward should be compelling enough, as I was awaiting a partial re-rating over time.
Since August, shares of Brady have risen from $48 to $58 at this point in time, after they have traded in the low-sixties in recent weeks. In September of last year, the company reported a 2% increase in 2023 sales to $1.33 billion, although that growth was more convincing in the fourth quarter. The company reported GAAP earnings of $175 million, equal to $3.51 per share, with adjusted earnings reported at $3.64 per share.
For 2024, the company guided for adjusted earnings between $3.85 and $4.10 per share, as the company hiked the full year dividend for the 38th consecutive year, to an annual payout of $0.94 per share.
By February, the company posted second quarter sales down a percent, attributed to divestitures, as otherwise, sales would be up nearly 2%. Despite the softer quarter, sales are still up very modestly in the first half of the year. Even as reported sales were somewhat soft, margins are moving in the right direction, with the lower end of the full-year earnings guidance being hiked by ten cents to $3.95 per share.
The 49 million shares now grant equity of the business a $2.84 billion equity valuation, a number which includes a $96 million net cash position, for an enterprise valuation of around $2.75 billion. This values the business at just over 2 times sales seen around $1.35 billion at this pace this year, and the unleveraged assets around 14 times earnings.
Soon after the release of the not-too-inspiring second quarter results, Brady announced a $133 million deal to acquire French-based Gravotech Holding. Gravotech is a leading designer, manufacturer, and distributor of engraving solutions. The company is expected to add $121 million in sales, as Brady is paying just over a 1 times sales multiple, while the own business traded around 2 times sales.
This looks compelling, but few details on margins are reported, other than that the deal is expected to be immaterial to 2024 results, the fiscal year which ends in July of this year. This does not say much, as the end of the fiscal year largely corresponds to the expected closing date of the deal.
Pro forma net debt is seen around $37 million, a minimal amount, as total sales will increase by nearly 10%, yet it feels and seems as if the margins of Gravotech trail those of Brady, as investors hope to learn more with the release of the third quarter results.
The truth is that shares have seen some 20% returns in about half a year in which sales growth has been lagging. On the other hand, valuations were non-demanding from the get-go as the company sees real earnings (and thus margin growth) driven by a greater focus on R&D as well as an internal reorganization to drive performance.
Moreover, the company has bought back on its leased facilities, as a $55 million factory purchase reduces operating expenses (read rental expense) from here going forward.
All of this is clearly appealing and bolstering the shares, all while M&A activity adds to the growth here, to the tune of around 10% to sales, with an unknown margin contribution. Amidst all this, I understand why shares have moved higher, and while I hold a modest position, I feel no need to change this position, as I would like to see a grater re-rating before considering taking some profits.