Going Back To Core Competency Could Help Brady Corporation Break To New Highs

| About: Brady Corporation (BRC)

Shares of identification systems manufacturer Brady Corporation (NYSE:BRC) are currently trading at $33.79 per share on May 22 after the company reported its third quarter fiscal 2013 financial results one week ago. After hitting a 52-week low of $24.72 per share on July 16 of last year, shares of BRC have dramatically risen 37 percent to their current level, which is only 8 percent below Brady Corporation's 52-week high of $36.45 per share that was reached during intra-day trading on February 15, 2013. For the year, the stock of Brady Corporation is virtually unchanged after closing at $33.40 per share on December 31, 2012. During that time, the stock of Brady Corporation endured a substantial setback in its year-to-date performance when the company announced its second quarter fiscal 2013 earnings results and a major reorganization of its core operational business structure on February 21. The significant business developments had a tremendous impact on the stock and essentially stopped the momentum BRC shares had been experiencing since rebounding in a powerful rally off the 52-week lows of July 2012. The stock endured a lower gap-opening, followed by a stunning 12 percent intra-day drop in the trading session that occurred immediately after the second quarter fiscal 2013 earnings and reorganization announcement.

The consequences of the February 21 developments in Brady Corporation's strategic direction and financial guidance have played a significant role in the performance of BRC shares in the three months since that time. It is critically important for potential investors in BRC to understand that the stock has been locked in a tight trading range since the second quarter fiscal 2013 earnings report and reorganization announcement. For current BRC shareholders, as well as new investors looking to add the stock of Brady Corporation to their equities portfolio, a thorough examination of the company's third quarter fiscal 2013 financial results, ongoing developments in its reorganization effort, an analysis of its technical chart pattern and current ratings of analysts that cover the company's stock will provide clear insights into the likelihood for greater performance for the remainder of the year.

Before Brady Corporation announced its Q2 fiscal 2013 financial results on February 21, shares of BRC were enjoying a very solid start to the year by rising an impressive 6 percent from the closing price of $33.40 per share on December 31, 2012. Shares subsequently tumbled after Brady Corporation's management released Q2 fiscal 2013 financial results that included revised forward guidance that the company's president and chief executive officer Frank Jaehnert anticipated would be at the low-end of a range of $2.20 to $2.40 earnings per diluted share for the entire full-year fiscal 2013. The Q2 fiscal 2013 earnings press release also described the company's strategic initiative to divide Brady Corporation into three distinct operational business structures, instead of the former organizational model that was based on the relative geographic locations of the units. After the market's negative reaction to the news, the third quarter fiscal 2013 earnings announcement and management conference call offered BRC executives a great opportunity to update analysts and investors of the progress in the company's financial results and reorganization effort.

As part of the reorganization, Brady Corporation originally announced that it was planning to structure the company around three core operational components: identification solutions, die-cut materials, and its workplace safety business. In its Q3 fiscal 2013 earnings release on May 16, Brady Corporation's chief executive Frank Jaehnert announced that the company was selling its Asia-based die-cut business operation in an effort to renew its focus on the core business structures of identification systems and workplace safety. During the last full-year fiscal reporting period, the die-cut operations generated $179 million in sales of components for electronics industry goods to makers of hard disk drives and handheld mobile devices. The sale of the business unit is a significant evolution from the original reorganization announcement on February 21 and shows the commitment of Brady Corporation executives to their core business operations of manufacturing employee identification badges, workplace signs, and labels for bar-codes. By containing the operational focus of the company in higher growth businesses, Brady Corporation management is demonstrating to its investors that it has a strategic vision that will translate into enhanced financial results in the coming quarters.

In the Q3 fiscal 2013 financial report released on May 16, Brady Corporation reported disappointing earnings of 8 cents per share, which was down substantially year-over-year from the 52 cents per share from the comparable quarter in 2012. When the costs of the reorganization are factored in, BRC generated pro-forma earnings of 55 cents per share, which represents a one cent drop from Q3 fiscal 2012 and is 5 cents below the average consensus estimate of industry analysts of 60 cents EPS for the quarter. Brady Corporation management also issued revised guidance for its fourth quarter fiscal 2013 earnings of a range from 45 cents to 55 cents per share, which also fell short of the consensus estimate by analysts of 61 cents EPS. Despite the discouraging news, BRC shares have only declined 5 percent since the Q3 fiscal 2013 announcement and are holding steady at their current price level around $33 per share.

The chart for BRC shares reveals a stock that has been locked in a rather narrow trading range since the company announced the start of its reorganization plan on February 21. The stock is essentially consolidating the tremendous gains it made from the 37 percent rally BRC shares experienced off the 52-week lows of July 2012. Importantly, investors should be aware that BRC shares are currently testing the stock's 50-day exponential moving average of $33.87 and appear poised to resume the rally that began in July 2012 with a successful test of this important indicator.

At present, industry analysts providing coverage of BRC shares have a consensus hold rating on the stock with a $32.50 per share price target. This analyst sentiment provides investors with a backdrop for likely upgrades and boosted price targets in the coming quarter as the benefits of BRC's reorganization initiatives begin to be realized. Investors and potential new stockholders of BRC are being offered an optimal entry point to purchase shares of Brady Corporation at their current $33.79 price level before the positive developments of the company's renewed focus on its core businesses begin to show up in future earnings reports.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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