Pooling solutions business Brambles (ASX: BXB) has handily outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the last 12 months, rising 19% compared with the index’s 15% increase. However over the last five years, which includes the GFC, Brambles’ share price has underperformed the index. So what is the cause of this near-term outperformance and medium-term underperformance?
Well it has a lot to do with Brambles’ business model, which is quite easy to understand. It all begins with the simple pallet. A pallet can be loaded up with boxed goods and creates a very effective way to transport a large quantity of boxed goods. Brambles’ primary business involved building pallets out of wood and then leasing them to many of the world’s largest manufacturers and retailers. This ties Brambles’ business to the supply and demand of consumers.
The down side to having such a large pool of pallets is that when an economy slows, many of Brambles’ customers slow down as well. This means less boxed goods are moved and fewer pallets required, which mean more of Brambles asset base sits idle, costing the company money and bringing in no income.
So what does Brambles do so well?
Brambles has become an expert in managing over 300 million pallets. This is no easy feat as it requires not just keeping tabs on where all the pallets are but also making sure the pallets are in the right place, at the right time for customers. Brambles have become expert at this logistical feat, creating the largest pallet pooling business in the world. What’s more, successive management teams have taken the original domestic model and replicated it in countries all around the world.
What about other logistics businesses?
It’s a similar story for other players in the freight and logistics space. They also are likely to underperform the index during a recession but given their leverage to a more buoyant economy, their earnings bounce back when the economy strengthens. As the chart below shows, Toll Holdings (ASX: TOL), K&S (ASX: KSC) and Brambles all underperformed over the last five years, a period of economic weakness. The one exception was Qube Logistics (ASX: QUB), which has enjoyed significant growth from a very low base.
Source: Google Finance
Short-term macroeconomic forecasts and specific time frames rarely give an investor a clear picture. Over the long-term, Brambles has successfully grown its business and outperforms the index. The near-future may be difficult to judge but there is a high likelihood that in the long run Brambles will be doing significantly more business and earning significantly larger profits than it is today.
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