Brambles to competitor: Wood beats plastic

The numbers just didn’t stack up

a woman

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Investors with long memories, will remember some years back when investors were deserting pallet pooling solutions company Brambles (ASX: BXB) in droves. Investors were concerned that an upstart US-based plastic pallet maker iGPS, which was started by an ex-Brambles employee, had created a new competing product, namely a plastic pallet that customers would prefer, to Brambles wooden one.

While Brambles was no doubt worried when some customers moved across to iGPS’s plastic pallet, Brambles emphasised to the market that the numbers just didn’t stack up. A plastic pallet cost around $60 to produce, while a timber one cost $20. After adjusting for the longer life of a plastic pallet it still didn’t make economic sense.

News last week from the USA that iGPS was seeking bankruptcy protection suggests Brambles was ‘on the money’ so to speak. It also reinforces the fantastic moat Brambles pooling business enjoys thanks to the economies of scale inherent in a successful pooling operation.

The beauty of Brambles business model was highlighted recently when Motley Fool Analyst Joe Magyer reported to Hidden Gems subscribers in his re-cap from the Morningstar Investor Conference. Joe reported comments by David Pace of Greencape Capital which mentioned that Pace found it very hard to understand how Telstra Corp (ASX: TLS) could sell for a lower free cash flow yield than Brambles (after adjusting for growth capex) given Brambles track record and opportunity set.

Shareholders have enjoyed impressive returns from Brambles and that looks set to continue given the softening Australian dollar. Like other companies with significant overseas revenues, such as Computershare (ASX: CPU), Ansell (ASX: ANN) and Breville Group (ASX: BRG), Brambles shareholders can expect benefits from translation of dividends and earnings into Australian dollars.

Foolish takeaway

It can be tough to decipher a significant threat to a company from a small bump in the road but that is exactly what investors need to do. The threat to Brambles from iGPS was nothing more than a bump and turned out to be an excellent opportunity for investors to buy a high quality company.

Looking to decipher high yielding ASX shares from high risk ASX shares? Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Tim McArthur has no financial interest in any company mentioned in this article. The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

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