As the COVID-19 pandemic takes hold of the global economy, many businesses face serious headwinds. Despite the gloomy outlook, there are pockets of sustainable growth to be found.
Brambles Limited (ASX:BXB) is one of the companies on the ASX that is poised to continue growing during the COVID-19 pandemic due to its defensive qualities and strong supply chain. So, is it worth buying shares in Brambles?
What does Brambles do?
Brambles is a logistics giant, with the company owning more than 330 million pallets and crates which are used to transport goods from manufacturers to retail stores and online operators. Brambles operates in approximately 60 countries around the world through its iconic CHEP brand.
The Brambles business model boasts the largest pool of reusable pallets and containers which results in a reliable and efficient supply chain. In 1H20, the company made 45% of its revenue from the US, followed by Europe which contributed 33% to sales revenue.
How will the coronavirus pandemic impact Brambles?
Brambles is actually poised to be one of the beneficiaries of the panic caused by the coronavirus pandemic. The chaotic demand from consumers panic buying and stockpiling goods has trickled to supply chains, with supermarkets frantically looking to sustain stock.
The food sector has been declared as an essential service and contributes a significant portion of business for Brambles. In addition, the company has significant exposure to the US and Europe which have become hotspots for the COVID-19 pandemic.
Domestically, Brambles also recently secured a 10-year contract with supermarket giant Coles Group Ltd (ASX: COL) to deliver reusable plastic crates for its produce operations.
Recently, equity analysts from Macquarie upgraded the Brambles share price to an ‘outperform’ rating, with analysts expecting the company to continue growing through the COVID-19 pandemic.
According to analysts, Brambles is poised to deliver growth during the pandemic as the company is largely exposed to consumable products. Panic buying and stockpiling of goods is expected to fuel growth for Brambles, with analysts estimating an 8% earnings before interest and tax (EBIT) annual growth rate.
Analysts also highlighted the highly defensive nature of Brambles and exposure to developed markets which will allow the company to have resilient earnings growth in a global recession. As a result, analysts increased the share price target for Brambles from $12.50 to $12.90.
Should you buy Brambles shares?
The defensive nature of Brambles and a weaker Australian dollar has the company well poised to continue growing despite the challenging economic conditions.
In addition, with only 1.2% of 1H20 sales coming from Asia, Brambles is unlikely to feel adverse impacts of a temporary slowdown in China.
The Brambles share price has remained steady during the market turmoil and is currently trading around 12% below its February high. As a result, the defensive qualities and market outlook for the company make its current share price look like a tempting buying opportunity.
Going forward, I think a prudent strategy would be to keep Brambles and other strong companies on a watchlist and add them to your portfolio accordingly as a hedge.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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.