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I went to the list of top % gainers on the Nasdaq and the NYSE today, hoping to find a new name to discuss. But the best stock I could find was an 'old favorite' of mine, that is, a stock that I had previously reviewed here on the blog. Brady (BRC), as I write, is trading at $38.00, up $1.30 or 3.54% on the day, enough to make the top % gainers list.
I first reviewed Brady on Stock Picks Bob's Advice on November 18, 2005, when the stock was trading at $38.90. So ironically, the stock is actually lower than the price I first mentioned it a year ago, and yet I still believe the company deserves another look. Now of course, some of you skeptics out there might have been able to determine that Brady is headquartered in Milwaukee, so being a real 'cheese-head-Packer-fan' sort of investor, you might think I am just out there boosting Wisconsin firms! But seriously, even though I am proud to point out another Wisconsin company, I still would like Brady even if it were from New Hampshire or North Dakota :). (Now you New Hampshire and North Dakota readers don't need to take offense :), I like these states as well!)
Let's take another look at this company and I will share with you why it still deserves a place on the blog. By the way, I do not own any shares of Brady, nor do I have any options on this stock!
What exactly does this company do?
According to the Yahoo "Profile" on Brady, the company
"...engages in the manufacture and marketing of identification solutions and specialty materials worldwide. Its products include facility and safety signs and identification tags and markers, pipe and valve markers, asset identification tags, lockout/tagout products, security and traffic control products, and printing systems and software for creating safety and regulatory software; wire and cable markers, labels, laboratory identification labels and printing systems, stand-alone printing systems, bar-code and other software, and automatic identification and data collection systems; and precision die-cut products for use in hard-disk drives, cellular phones, pagers, automobiles, and other personal communication products."
How did the company do in the latest reported quarter?
On November 15, 2006, Brady reported 1st quarter 2007 results. Sales for the quarter ended October 31, 2006, increased 42.8% to $332.3 million, up from $232.6 million in the same quarter the prior year. The company was careful that acquisitions added 34.6% and currency exchange rates added 2.5% to that figure, but "base business" contribued 5.7% of an increase in sales. Net income for the quarter climbed 14.1% to $34.4 million from $30.2 million last year. Earnings per diluted 'Class A' common share came in at $.63/share, up from $.60/share last year.
One of the things I like to look for in an earnings report is any indication about company guidance. In other words, does management feel that things are actually better than expected and raise guidance or does it feel the reverse? in fact, Brady raised guidance for fiscal 2007 on sales to between $1.25 and $1.275 billion, up from prior guidance of $1.225 and $1.25 billion. In addition, the company raised guidance on net income to $122 and $126 million, up from $120 to $125 million, and earnings per share of $2.22 to $2.29 from $2.18 to $2.27. It is bullish, from my perspective, whenever a company reports solid results and raises guidance!
Another factor in evaluating an earnings report is determining if a company has met, failed to meet or exceeded expectations. As reported, analysts polled by Thomson Financial were looking for revenue of $309 million, and Brady came in at $332.3 million. An analysts were expecting per-share income of $.60, and Brady came in at $.63. All-in-all, this was a very nice earnings report!
How has the company been doing longer-term?
For this, I like to turn to the Morningstar.com "5-Yr Restated" financials. Let me review a few of the important points, from my perspective, from this page. And if you are able to open up the page as I review it, all the better to understand what I am looking at!
To start with, the revenue growth is steady and strong the past five years. Brady reported $517 million in revenue in 2002 and has increased steadily to $1.02 billion in 2006 and $1.12 billion in the trailing twelve months (TTM)
Earnings did take a small dip from $.60 in 2002 to $.46/share in 2003. However, the earnings rebounded as if there never was a dip, to $1.07 in 2004, up to $2.07/share in 2006, and $2.10/share in the TTM.
As an 'added plus' the company does pay a dividend and has been increasing that dividend each year at least since 2002 when they paid $.38/share, up to $.52/share in 2006 and $.53/share in the TTM.
The company has increased its shares outstanding modestly from 46 million in 2002 to 50 million in 2006 and 54 million in the TTM. I say 'modestly' because during this same period revenue climbed over 100%, earnings were up 200% while the number of shares was up just over 15%. Thus, while I prefer to see little increase in shares outstanding, if a company can increase its revenue and earnings considerably faster than its increase in shares, I can accept and support those moves in issuing shares!
Free cash flow has been positive and steady the past few years with $73 million in 2004, $97 million in 2005, $75 million in 2006 and $74 million in the TTM.
Brady's balance sheet looks solid from my perspective as reported by Morningstar.com. They have $87.5 million in cash and $379.1 million in other current assets. Combined, this $466.6 million in current assets, when compared to the current liabilities of $212.6 million yields a healthy current ratio of 2.19. The company does have an additional $427.2 million in long-term liabilities but this does not appear to be an excessive burden with the solid current ratio and the continued free cash flow.
What about some valuation numbers?
Looking at the Yahoo "Key Statistics" on Brady, we find that the company has a market cap of $2.05 billion making it a mid cap stock. The trailing p/e is a reasonable (imho) 18.04 with a forward p/e (fye 31-Jul-08) of 14.48 estimated. The PEG is an acceptable 1.35. (5 yr expected as estimated).
Reviewing the data from the Fidelity.com eresearch website, we can also see that valuation is reasonable in regards to the Price/Sales (TTM) ratio, which is reported at 1.69 for Brady with an industry average of 2.29. This puts the company at the 72nd percentile within its group. In this case, lower is better!
In terms of profitability, Brady is more profitable than the average company in its group with a Return on Equity (TTM) of 16.65%, with an industry average of 6.98%. This puts the company at the 67th percentile of its group.
Returning to Yahoo, we find that there are 53.93 million shares outstanding with 46.99 million that float. As of 11/10/06, there were 2.77 million shares out short, representing 5.6% of the float or 17.3 trading days of volume! I personally use a '3 day rule' of significance on this short interest, and 17.3 trading days is quite significant with an average volume of under 200,000 shares. Thus, we may well be seeing a squeeze of the shorts, as short-sellers scramble to buy shares to cover their 'bets' that the stock price would be declining.
As noted above, the company pays a 'forward' dividend of $.56/share, with a 'forward' annual yield of 1.5%. The last stock split was a 2:1 stock split on January 3, 2005.
What does the chart look like?
Reviewing the "point & figure" chart from StockCharts.com on Brady, we can see that the stock, which dipped from $19 in April, 2002, to a low of $12.50 in January, 2003, has steadily appreciated since that time. If you recall my review of the Morningstar information (above), this period time correlates with the dip in earnings reported. The steady increase in the stock price since also correlates with the steady growth in the earnings and revenue since 2003.
Summary: What do I think about this stock?
Let's review a few of the points I have made about Brady. First of all even though I don't own any shares, I do like Wisconsin firms, so take that into consideration if you will. But seriously, they made a nice move today on the back of a load of shares out short. They reported earnings last month that exceeded expectations for both earnings and revenue and they went ahead and raised guidance. (Who would go short against that kind of news?) And they have been increasing revenue and earnings steadily for the past several years. In addition, they have kept the growth in the number of shares outstanding to a reasonable level, and they pay a dividend and have been increasing that dividend each year for the past several years as well! They are generating plenty of free cash flow and the balance sheet is solid.
Valuation, the p/e is in the mid teens, the PEG is under 1.5, the Price/Sales is below the average for the group, and the ROE is higher than the average. Finally, the chart looks solid. What else could an investor want?
This is my kind of stock, and if I were investing today, that is, if I had a signal to add a new position, this is the kind of company I would be acquiring shares in!
Thanks so much for stopping by and visiting! If you have any comments or questions, please feel free to leave them on the blog or email me at firstname.lastname@example.org. If you get a chance, be sure and visit my Stock Picks Podcast Site! Happy Holidays everyone!