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, Barel Karsan (368 clicks)
Long only, deep value, contrarian, bonds
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Brink's (NYSE:BCO) is the largest provider of secure transportation and security-related services in the US. The company has steadily generated excellent returns on capital over the years, but due to the recession demand from banks and retailers for cash and jewelry transport and security has slowed.

As a result, Brink's trades at a decent valuation for a company with a market cap above $1 billion. Shares of BCO trade with a P/E under 7, while the stock price doesn't trade much higher than it did at this time last year, when stocks dove to their lowest levels of this recession. Low P/E and high ROE stocks are exactly what investors should be looking for in order to outperform the market, as Joel Greenblatt has made a living discussing.

However, this stock illustrates an important lesson when it comes to applying the P/E formula. While the operating income of Brink's is depressed due to the recession, its income (the "E" part of the P/E formula) is well above its operating income in 2009, thanks to a one-time tax gain. This makes the P/E of Brink's appear larger than it should, and could entice an investor to purchase for the wrong reasons. As we've discussed before, earnings should be averaged over time in order to derive an estimate for earnings that is absent of one-time losses or gains.

Of course, this doesn't mean Brink's isn't still potentially undervalued. The company has a strong brand name and a lengthy history of operations that allows it to attract customers in an industry where reliability is a key success factor. Earnings are also likely temporarily depressed as the banking and retail sectors aren't seeing the transaction sizes that they used to; but Brink's has the balance sheet strength to outlast this downturn. But in coming to a conclusion as to whether the stock is undervalued, just don't be fooled by the headline earnings number!

Disclosure: No positions

Source: Is Brink's Undervalued? Don't Let Its P/E Fool You