A stock picker’s guide to Brambles Limited in 2014

The outlook is positive for Brambles with earnings forecast to increase.

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Brambles Limited (ASX: BXB) is a pooling solutions company which specialises in reusable pallets, crates and containers. While the company is best known for its blue wooden pallet which is branded CHEP, Brambles business is now about much more than just the CHEP pallet, thanks to acquisitions which have expanded its operations into reusable plastic containers (RPC). A particularly important acquisition was the 2011 IFCO systems’ purchase, which is the world’s largest RPC business.

What happened in 2013?

2013 was a sound year for Brambles with the company delivering a 5% increase in underlying profit to US$1.057 billion. Highlights from the year included pallet revenue from emerging markets (a growth area for the company) up 15%; further operating efficiencies from the IFCO acquisition; and 15% growth in RPC revenue (another growth area).

The single biggest change for the company was the decision to demerge its document management business from the Brambles’ pooling operations, which led to the listing of Recall Holdings Ltd (ASX: REC).

Outlook for 2014

The demerger of Recall has left Brambles solely focused on pooling solutions. The firm’s exposure to emerging economies and leverage to the increased flow of goods from a pick-up in economic activity creates significant upside potential. Management’s guidance for financial year (FY) 2014 is for a 4% to 8% increase in underlying profit.

On the dividend front, Brambles raised its dividend by 1 cent per share (cps) to 27 cps in FY 2013. Shareholders will need to account for the removal of Recall’s earnings when forecasting the payout for the coming year, however based on data provided by Morningstar, Brambles is forecast to pay a dividend of 24.5 cps.

Foolish takeaway

Investors looking for companies which offer exposure to a pick-up in global economic activity should keep both Brambles and transport and logistics provider Toll Holdings Limited (ASX: TOL) on their watchlist. Both companies operate around the globe with high fixed cost bases which insert significant leverage into their respective business models.

Motley Fool contributor Tim McArthur owns shares in Toll Holdings Ltd.

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