Would global trade work without Brambles Limited?

Brambles Limited (ASX:BXB) is one of the key cogs in global trade, but is it worth buying right now?

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With global operations and exposure to a falling Australian dollar, a rising US dollar and an improving global economy, you could easily make a case to buy Brambles Limited (ASX: BXB).

The company specialises in the moving parts that allow global trade and commerce to take place. That means providing management services and assets including wooden pallets, plastic crates and containers to businesses around the world.

And if that business model sounds a little simplistic, just go to the receiving bay of any supermarket or YouTube a video of a port in action to see why things wouldn't work without pallets and containers. The business model works because companies of all sizes do not want to have to invest in equipment of this nature, then have to track it and have it returned once deliveries take place. Brambles products and services allow companies to focus on more "core" activities, while Brambles takes care of the supply chain logistics.

Is there a competitive advantage?

With revenue of over US$5.4 billion last year, it's clear that Brambles has substantial operations across the world. This size has allowed it to achieve some of the necessary economies of scale and procurement that drive competitive advantages.

The global nature of the industry and high margins have attracted competition and innovation in an attempt to disrupt the business and build market share. For example, an American company led the charge recently by offering lighter pallets made from plastic instead of wood, and enhanced pallet tracking so that customers could see exactly where their shipments were at all times.

But neither of those innovations bore fruit, and the older, sturdier wooden pallets coupled with the sheer numbers that Brambles could offer meant that it was able to maintain its privileged position in the market.

High cash burn

However, the second desired feature of businesses with competitive advantages is the ability to exploit those advantages effectively to generate increasing compounding returns on invested capital.

Brambles scores poorly on this measure, spending between $700 million and $800 million each year on capital expenditure or "maintenance capital". The reason is that the company has to distribute, collect and maintain literally hundreds of millions of wooden pallets, crates and containers on almost every continent on Earth. And being loaded into ships and trucks and moved around by cranes and forklifts means that there is inevitably going to be a sizeable amount of damage to the assets that the Brambles business is built on.

The big picture

Looking into the future, it is almost certain that global commerce will grow, fuelled by more demand from the emerging economies of the world, better trade routes and lowering barriers to trade. The companies that provide the moving parts that facilitate this huge and long-term trend will be well placed to benefit, which is why Brambles deserves a place on your watchlist, even though it may not be a buy right now.

Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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