Is the Brambles share price a hidden buy?

The Brambles Limited (ASX: BXB) share price has climbed 19.4% higher since March but is the S&P/ASX 20 company a buy?

What does Brambles do?

Brambles is a global supply chain logistics business operating in over 50 countries. The group specialises in the pooling of unit-load equipment, pallets, crates and containers.

The company’s most prominent brands are Commonwealth Handling Equipment Pool (CHEP) and IFCO.

Brambles listed on the ASX in November 2006 and is now an ASX 20 company with a $16.7 billion market capitalisation.

How good are the company’s financials?

Clearly the coronavirus pandemic has made earnings outlooks uncertain. However, Brambles’ half-year result in February was broadly positive.

One factor that could make the Brambles share price a buy is the company’s strong earnings growth.

Sales revenue climbed 7% and landed in the upper end of Brambles’ guidance range. 4% of that was attributed to volume driven by strong demand from the CHEP pallet business.

Underlying profit climbed 5% to US$435.5 million for the half-year with a minor improvement in its United States segment margin and cash flow.

Overall, I was impressed with Brambles’ half-year result. The big question now is whether the Aussie company can follow that up with another good result in August.

What do the share price metrics say?

As I said, the Brambles share price has climbed 19.4% higher since mid-march. However, it remains down 4.9% for the year.

That’s still an outperformance against the S&P/ASX 200 Index (ASX: XJO) but no doubt investors will want more.

The Brambles share price is trading at a price-to-earnings (P/E) ratio of 8.6 right now. That’s not bad in the current climate but could also be unreliable given the pandemic’s potential impact on earnings.

The company’s 2.52% dividend yield is nothing to sneeze at but is also far from certain to be maintained this year.

Has Brambles provided any recent updates?

In its April third-quarter trading update, Brambles forecast FY20 sales revenue growth of 5-7% at constant-FX rates. FY20 underlying profit growth is expected to come in at 3-5% at constant FX rates and including AASB16 impacts.

Those earnings are underpinned by fortunate industry dynamics. For instance, 80% of the CHEP pallets business revenues come from the consumer staples sector like supermarkets which have seen strong demand in 2020.

The company also noted its ‘conservative balance sheet and strong liquidity profile’. That, combined with reaffirming its February guidance for FY20, could make the Brambles share price a hidden buy.

Is the Brambles share price a buy?

Overall, I think the company’s 8.6 P/E makes the Brambles share price at least worth considering.

In the current climate, cash is king. With a strong balance sheet and significant expected cash flow generation in FY20, the Brambles share price could be headed higher this year.

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Motley Fool contributor Ken Hall 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.

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