3 reasons Brambles should be on your watchlist

There are many reasons to get excited about this blue-chip stock.

Global pooling solutions company Brambles (ASX: BXB) has a market capitalisation of nearly $14 billion and operations that span over 50 countries and employ over 18,500 people. The firm is particularly well known for its widely recognised blue wooden CHEP pallet. Having reported a 5% increase in underlying profit to US$1.057 billion in financial year (FY) 2013, here are three reasons Brambles is set to continue growing in the future.

International opportunities

Brambles’ operations in emerging markets saw 19% growth in revenues in FY 2013. This is an outstanding rate of growth for a business the size of Brambles and shows the depth of opportunities still available to the company in emerging markets. Meanwhile even in advanced economies such as the USA, Brambles managed to grow its pallet revenue by 7% thanks to customer wins and volume growth.

Improving returns from RPC

Currently the returns on invested capital from reusable plastic containers (RPC) are significantly lower than the returns attained from the pallet pooling operations. While it’s quite possible RPC will never provide as high returns as pallets, there is definitely scope for management, over time, to improve the returns generated from RPC as it further integrates the IFCO acquisition.

With total sales revenue from RPC of US$813 million in FY 2013 but only US$163 million of those revenue generated in North America, compared with US$511 million out of Europe, the relatively low penetration of RPC by Brambles in North America further highlights the opportunities which are still ahead of the firm.

Recall demerger

The document storage business Recall reported a decline in revenues of 4% and a decline in underlying profits of 17% in FY 2013. Management has for some time believed that a separation of the Recall business from the pooling business is in the interests of shareholders. With a demerger likely to occur in coming months, management should hopefully be able to focus on growing the pooling business without the distraction of managing the Recall business to the advantage of shareholders.

Foolish takeaway

Management is forecasting underlying profit growth in Brambles ex-Recall of between 4% and 8% in FY 2014. The strong free cash flow generated by the firm allowed the board to raise the dividend last financial year by 1 cent to 27 cents. Further growth in future earnings should underpin further growth in dividends going forward.

In an overall economic environment marked by low growth, a company such as Brambles which is managing to grow its earnings and dividends is highly sought after – this has led to its shares looking fully priced at current levels.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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