Why Brambles has lagged the market

Pooling solutions company Brambles (ASX: BXB) has had a lacklustre 2012 so far. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 11% for the year, Brambles’ share price is flat.

Brambles released its full year 2012 results in August and reported revenue growth across all divisions. More importantly, profit and earnings per share were also up around 20%. So while the share price has been lacklustre, company earnings have been anything but!

The pallet division, Chep, with its distinctive blue wooden pallets had exceptional revenue growth of 25% in the Americas region and expanded margins. Other regions, though, struggled in the face of slowing economic growth that restricted revenue growth and squeezed margins.

The first full 12-month contribution from the $1 billion IFCO acquisition led to a jump in revenue for the Recyclable Plastic Containers (RPC) division, while the Containers division won new business leading to a 20% increase in revenue.

Lastly, the information management services division, Recall, reported revenue growth of 4% and earnings before interest and tax (EBIT) growth of an impressive 19% on the back of margin expansion. In June, Brambles unexpectedly announced that it was retaining the Recall business due to management’s view that bids for Recall did not reflect the underlying value. In response to the cancelled divestment, a capital raising was undertaken to bring down debt levels following the IFCO acquisition. Even after the capital raising however, debt levels do remain high.

With a shareholder-oriented management team, a decent growth profile, salivating margins, and impressive full year results, why has Brambles’ share price been lagging?

Two potential reasons stand out.

First, as Warren Buffett famously wrote, “Price is what you pay and value is what you get”. Brambles certainly seems to be a company with significant intrinsic value, however the price perhaps already reflects this. Assuming the market is acting rationally, it may be that the share price is taking a breather while the value catches up.

Second, Pooling Solutions services a wide range of customers across many industry sectors. Customers include global powerhouses engaged in the manufacture of Fast Moving Consumer Goods (FMCG), such as Nestle, and domestic customers such as Bonds brand owner Pacific Brands (ASX: PBG) and airline Virgin Australia (ASX: VAH). Many Pooling customers face weak consumer demand. With the stock market focussed on macroeconomic factors, this too may be weighing upon Brambles stock price.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool contributor Tim McArthur owns stock in Pacific Brands Ltd. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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