At $9 is Brambles too expensive to buy?

Few investors would dispute that pooling logistics provider Brambles (ASX: BXB) has successfully built itself an enviable leadership position in many markets. Many investors would also likely say they’d be quite happy to own the company – at the right price of course.

At its recent full year results, Brambles reported underlying earnings per share (EPS) of US$0.435 cents per share (cps). Given the board’s plan to demerge the document storage business Recall from the wider Brambles group, investors really need to start thinking of the two businesses in isolation. The company is also thinking in these post-demerged terms, offering guidance for financial year (FY) 2014 for Brambles excluding Recall of growth in underlying profit of 4% to 8%.

Given Recall’s revenue and earnings declined in 2013, it is unlikely Recall will be a positive contributor to earnings in 2014 either. With Recall’s earnings contributing only around 10% to the overall group let’s assume Brambles can meet its mid-point guidance at 6% growth in Brambles ex-Recall and that correspondingly there is 6% growth in group-wide EPS to US$0.46 cps. Assuming a current exchange rate this translates into A$0.49 cps for the FY 2014 results.

Based on this forecast, Brambles is currently trading on a forward price-to-earnings (PE) ratio of 18.4.

There are few listed stocks that offer investors exposure to the same markets and same quality as Brambles, which can make comparable analysis difficult. Two stocks which perhaps come close in a number of respects are Ansell (ASX: ANN) and Amcor (ASX: AMC) given their global operations and end markets. According to Morningstar Ansell is forecast to earn $1.083 per share in FY 2014, which suggests a forward PE of 18.9 times. Meanwhile Amcor is forecast to earn 63.6 cps, implying a PE of 16.2 times.

Foolish takeaway

Brambles is a high return, wide-moat business and so arguably deserves a premium to the market and some peers. At its current price of $9 it looks to be commanding that premium, which suggests the stock is about fair value.

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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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