MENU

How Brambles Limited (ASX:BXB) could get an unexpected profit boost

Shares in Brambles Limited (ASX: BXB) are on a roll with the stock outperforming the market in recent months, but the share price of the global logistics group could jump higher as it has an opportunity to unlock close to $400 million in additional earnings, according to JP Morgan.

The stock has surged 25% over the past three months to $10.95 at the time of writing when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is struggling at breakeven.

Brambles’ profit results and outlook statement during the August reporting season has helped fuel the jump and JP Morgan thinks significantly more value can be unlocked if management can find a solution to the reuse of pallets problem.

Reused pallets are a hit to Bramble’s bottom line as pallets go missing or are damaged.

Retailers typically sign an agreement with Brambles to return its blue pallets after the original load has been removed at a retailer’s distribution centre. Enforcing this and claiming compensation is not a major issue.

However, this isn’t the same for large customers in the US as they are allowed to reuse the pallets to send goods to stores or to be stored at a distribution centre.

One possible solution is to create an internal closed-loop captive pallet pool that can be reused within a large customer’s store network, according to JP Morgan, although the broker admits that there are no easy or quick-fixes here.

But there’s a large financial benefit from solving the issue. The broker estimates that Bramble’s CHEP pallet business can generate an additional US$115 million to US$250 million in revenue from the solution and save millions more from lower damage rates and replacement costs.

“This implies potential additional operating earnings of US$143–270m [$197.8 million to $373.4 million] p.a., a circa 10–15% increase to our estimate for FY19 group operating earnings,” said JP Morgan.

“Our concern is that is that what looks good on paper (as a solution) may not be easy to implement in practice.”

The broker hasn’t factored in any upside from resolving this issue but it has an “overweight” recommendation on the stock with a price target of $12.75 a share.

I think Brambles is cheap too and I like the stock for its US dollar exposure and leverage to the pick-up in US economic growth.

This isn’t the only stock that is well placed to benefit from this thematic. Building materials suppliers Boral Limited (ASX: BLD) and James Hardie Industries plc (ASX: JHX) will also benefit from a rising greenback and US growth.

Looking for other large-cap buy ideas? The experts at the Motley Fool have picked three of their favourite blue-chip stocks for FY19 and you can find out what these are for free by following the link below.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Boral Limited and Brambles Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!