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Brambles Limited (ASX:BXB) “hidden profit upgrade” sparks a late share price bounce

The share price of global logistics group Brambles Limited (ASX: BXB) is making a comeback after investors overcame the weak headline figures in the company’s quarterly update to uncover a hidden profit upgrade.

Blink and you’d miss it!

This explains why the stock had initially tumbled as much as 1.2% in the morning following the release of the update before steadily climbing back into the black to trade up 0.2% at $10.44 in the last hour of trade.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index went the other way with broader market slipping further into the red to be down 0.8% at the time of writing.

Rising costs and the strong US dollar are headwinds for Brambles as group revenue inched up only 3% in the September quarter to US$1.4 billion.

Brambles’ chief executive Graham Chipchase conceded that the business is challenged by ongoing cost inflation across its major markets, including the US and Europe.

The rising greenback means group earnings in other currencies will suffer when converted into the US currency. Ignoring the exchange rate, quarterly sales are up 6% – which is in line with management guidance of mid-single digit growth.

What’s more, Brambles is in the process of lifting prices to offset rising costs and has recovered around two-thirds of the cost inflation in the first three months of the financial year.

This means underlying profit in the first half of FY19 is likely to be flat on a constant currency basis. Not great news but that shouldn’t surprise anyone as consensus is expecting a flat FY19 anyway.

But here’s where it gets interesting. Management said that the second half of the year is likely to show growth. This is driven by further price increases, a lower cost base compared to the same period last year and cost-cutting across the group, which includes the benefit of its new automation initiatives that it is rolling out.

What this adds up to is that consensus forecast might need to be increased in FY19 and FY20. The upgrade might be modest, but that’s still something worth celebrating as Brambles had been put in the doghouse by some analysts due to cost worries and its lack of operating leverage.

Of course, a volatile exchange rate could play havoc with its bottom line but I think investors are willing to overlook that if management can show that it is overcoming the operating issues (including missing pallets) that have plagued management over the past year or two.

Foolish Takeaway

The headwinds buffeting the stock are easing at a time when the tailwinds are growing. This makes Brambles worth the punt in my book.

This isn’t the only stock with large US exposure that I like. Investors should be overweight on stocks that are well placed to benefit from a booming US economy, and that includes the likes of packing group Amcor Limited (ASX: AMC), building materials supplier Boral Limited (ASX: BLD) and steel producer BlueScope Steel Limited (ASX: BSL).

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, 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.

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