Brady Corporation isn’t a business that rolls off the tip of your tongue like an Apple or Costco might but it’s been around a long time, over a century in fact, and is a global leader in safety, identification, and compliance solutions.
Although it got its start back in 1914, Brady is now best known as a provider of identification and workplace safety solutions via its two primary segments, Identification Solutions (IDS) and Workplace Safety (WPS).
The company is particularly interesting now because it’s got a lot of tailwinds and potentially a technical breakout supporting higher prices.
> Raised dividend for almost 30 years
> Improved gross margins
> Analysts revising estimates higher
> Low P/E relative to earnings growth
> Management share buyback pic.twitter.com/quG5fvkOxn— Financhill (@financhill) July 16, 2024
Brady Is Beating The Street
One of the reasons analysts have been upgrading their earnings forecasts is that the company reported strong earnings that surpassed analysts’ expectations on several fronts.
EPS of $1.09 beat the consensus estimate of $1.02 and marked a 14.7% increase from the previous year’s figure of $0.95. Net income of $50.9 million also compared well to the $48.1 million figure reported in the same quarter the previous year.
On the all important top line, management reported revenue of $343.4 million, a 1.9% year-over-year increase from $337.1 million, representing a beat of analysts’ expectations which were $339.8 million.
On the back of solid earnings, management raised its earnings guidance for the fiscal year ending July 31, 2024 with GAAP earnings per share now forecast to be in the range of $3.93 to $4.00, up from the previous range of $3.80 to $3.95
What Will Drive Future Growth?
What might have skipped past most casual observers of Brady stock is that it has significantly increased its investment in research and development, with R&D expenses rising to $16.8 million in Q2 FY2024, up from $15.4 million in the same period last year.
The investment has resulted in the launch of advanced products such as the BBP35 and BBP37 industrial label printers, which feature automation and connectivity capabilities.
It’s also invested heavily in e-commerce platforms and digital tools has led to increased online sales and boosted customer engagement. This is evident from Brady’s online sales growing by 12% year-over-year in the most recent quarter.
The company has further been integrating software solutions into its product offerings to allow customers manage and track their safety and identification needs more efficiently, further boosting sales.
Brady has been acquisitive too and recently snapped up Nordic ID, a leading European provider of RFID solutions, in order to strengthen its presence in the region. It is forecast that this purchase will contribute an additional $25 million to the top line.
It’s further clear that international expansion is a key focus for the firm with Asia and Latin America in particular set to drive substantial growth. Sales in these regions grew by 8% year-over-year in Q3 FY2024, significantly outpacing growth in more mature markets.
Lastly, operational efficiencies are trending in the right direction following the implementation of several lean manufacturing initiatives that resulted in a 50 basis point improvement in operating margins to 17.5% in Q3 FY2024
Does Brady Have a Moat?
With a 110 year history, it’s tough for competitors now to easily encroach on Brady’s business. The diverse product portfolio featuring a wide range of high-performance labels, signs, safety devices, printing systems, software, and safety services are a cornerstone of its economic moat.
And they don’t just serve a single industry but cater to various industries ranging from healthcare and aerospace to manufacturing and telecommunications.
Those customer relationships turn out to be a competitive advantage too because Brady can lock in long-term contracts with key customers. By way of example, it recently signed a multi-year contract with a major healthcare provider to supply identification solutions for patient safety and inventory management. The deal is expected to generate approximately $30 million in annual revenue.
The company’s geographic reach cannot be understated either. Brady now operates in over 100 countries, providing it with a broad geographic footprint that offers worldwide revenue potential and diversification.
If you were to sum up the company’s moat, it would have four prongs including brand strength, a diverse product portfolio, a global distribution network, and a heavy investment in R&D that keeps it at the cutting-edge to fend off up-and-coming rivals.
Is Brady Corp a Good Investment?
Brady Corp has the hallmarks of being a good investment long-term having raised its dividend for 28 years, increased gross margins, and trading at a low price-to-earnings multiple.
Speaking of the dividend, Brady has been paying it out for 41 years and the current yield is 1.41% and the payout ratio is just 23.59% suggesting ample room to increase it over time.
Better yet, that PE multiple is low relative to the future earnings growth which is why the PEG sits under 1 at just 0.93.
The cat is out of the bag it seems among the insiders who authorized a share buyback last year to the tune of $100 million.
Even now, the share price seems to have upside potential with analysts forecast consensus that it will hit $76 per share.
That is not a surprise given that the most recent quarter reported had the highest earnings before interest and taxes on record over the past 3 years. So too is the balance sheet healthy with $151 million in cash and equivalents against just $49.7 million in long-term debt.
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