Brady Corp: Putting The Balance Sheet To Work

Jun. 20, 2021 9:37 AM ETBrady Corporation (BRC)

Summary

  • Brady Corp has been a steady name that has run its business in a conservative way.
  • The company used its strong financial footing in part for three recent deals, bolstering earnings and the growth profile.
  • I like the moves but think that the overall market valuation looks fair, given the operating performance of the business.
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Het concept van het woord M&A op kubussen op een mooie groene achtergrond
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Brady Corporation (NYSE:BRC) is an undercovered stock on this platform. The company has been a stable operator which traditionally operated with a rock-solid balance sheet, which it used to make three bolt-on acquisitions in recent times, deals which should boost the growth profile and earnings growth.

I consider shares to be largely fairly valued here despite the deals, as I see no imminent appeal, not believing this company deserves a premium compared to the market as the mid-term operating performance has been rather sluggish.

The Business

Brady has a fiscal year which ends in July, so nearly a year ago the company reported its 2020 fiscal year results. Sales fell just over 5% that year to $1.08 billion as the pandemic impacted the results towards the end of the year. The business has two major segments. Identification solutions makes up more than two-thirds of sales and carries the best margin profile, with margins at nearly 20%. Products to think of include safety & facility ID, product ID, wire ID, and healthcare ID products.

The second segment is the workplace safety business and while it is much smaller, it has inferior profits as well, with operating margins reported in the high-single digits. Products include signs, tags, labels, safety equipment, pylons, and others.

In terms of the margins, the company squeezed out a net profit of $112 million, equal to $2.11 per share as this number was impacted by impairment charges to the tune of $0.21 per share. With adjusted earnings power at $2.32 per share and shares trading in the mid-forties this past summer, this worked down to a roughly 20 times earnings multiple. Note however that the balance sheet was very strong, with net cash of $217 million, more or less equivalent to $4 per share.

2021 - An Eventful Year

In May, the third quarter results were quite strong. Sales of $295 million jumped roughly 11% in part because of a tough third quarter in the year before and some operating performance as of recent. Through the first three quarters of the year, the company reported earnings of $1.93 per share.

With shares trading at $55, the just over 52 million shares outstanding translate into a $2.86 billion equity valuation, or $2.54 billion after accounting for $322 million in net cash as of the third quarter. With earnings power trending at around $2.50 per share, valuations have risen to roughly 20 times earnings, or actually just a bit below as the company hiked the full-year earnings guidance to a midpoint of $2.63 per share. Here, shares trade at just over 2 times sales.

The day after the earnings were reported, the company announced the bolt-on acquisition of Magicard, a UK ID-printing technologies business. With a purchase price of $59 million, the deal is set to add $32 million in sales, as the 1.8 times sales multiple is largely in line with the 2.1 times multiple at which Brady trades at large. The deal is truly a bolt-on deal, contributing 2-3% of sales, as non-quantified accretion in terms of earnings is expected as a result of the transaction.

A much more important deal was announced in June, as activity on the M&A front is clearly picking up here. Brady reached a deal to acquire The Code Corporation in a $173 million deal. The high-quality barcode scanner and software business will add $50 million in sales, indicating that the purchase price is a bit more expensive at 3.5 times sales.

The EBITDA contribution is seen at $10 million, revealing margins around 20% as these margins are far higher than Brady's at large, as this is a higher value business. This deal will add another 4% to pro-forma sales and be accretive to earnings as well, although the most recent deal-making makes that most of the net cash position will be depleted here.

A Final Word

Recent deals will likely boost sales to the tune of 7-8%, as the fact that this is paid for with low-yielding net cash makes that real accretion could be seen to earnings. Together with some economic growth, I see a roadmap for earnings close to $3 per share (albeit that most of net cash is depleted), as more exposure is obtained towards technological and service businesses, which are more future-proof and should carry higher margins.

With shares still trading at $55 here, the unleveraged business is valued at a market multiple which looks fair as the organic pace of growth of the overall business is not superior. This comes as the company has some more challenging activities as well, albeit that the third quarter has been quite good overall.

While the latest M&A string is interesting, I do think the valuation is fair at best, as I do not see imminent appeal as I do not believe a premium to the market is warranted, although I like the recent M&A and continued balance sheet strength.

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This article was written by

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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Disclosure: I/we 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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