Investing

Brinks: The Sweet Spot In A Rough Patch (BCO)

Shares of Brinks Co. (NYSE: BCO) are up significantly after today earnings report.  We have been behind Brinks for several months now, and it is still an active stock on our Special Situation subscriber letter.  This has approached our own $70 price target before the market malaise took it lower.  It actually never even did hit our downside panic levels, but we have a hedged scenario anyhow.

This morning Brinks managed to beat earnings quite handily.  Brinks posted earnings at $1.16 EPS, well above the $0.74 estimate from First Call; revenues were up more than 18% to $882.8 million, yet First Call only had estimates at $819.5 million.

Furthermore the company put 2008 goals for organic growth of high-single digits for revenues with operating profit margins at or above 8%.  Not only that, but Brinks is looking further out to 2010 with a goal of sustaining that rate of revenue growth and boosting its operating margins to 10%.

Our Special Situation thrust here was only partially based upon improving results, although we did expect a turn there again.  We have been tracking increased activist investor activity and after we reviewed the books, the business stance, its minor units that could be parceled out, and other factors, we determined that this stock could reach roughly $70.00.  Our entry area was in the mid-$50’s in September 2007, and we didn’t want to note the profits by taking them too soon in the mid-$60’s by early November.

As always, we laid out an options trade that allowed for hedging the transaction to minimize risk.  This is crucial for many turnarounds and for many businesses that have special situations they are working through.  In short, it’s important to have protection when management may intentionally or inadvertently take actions that result in negative shareholder value.

Jon C. Ogg
January 31, 2008