This report was originally published on 10/29/09.

The Brink’s Company (BCO 27.09 ↑0.11%) reported 3Q09 result this morning.  You c an read the full release here.  There were a number of “puts and takes” in the quarter that have clouded what we would otherwise characterize as a solid operational beat.   The two major non-operational offsets during the quarter were:

1. A one-time gain related to the company’s purchase of a controlling interest in Brink’s Arya, located in India. Brink’s has owned 40% of the company since 1981 and recently decided to up its ownership to 78%.  The transaction resulted in a mark-to-market of BCO’s existing stake resulting in a one-time $14 million pre-tax gain.
2. An increase in the company’s effective tax rate from the historical range of 25-28% to 34.7% for the quarter primarily due to lower tax benefits from the company’s international operations.

Excluding these items, BCO generated revenue, EBITDA, and EPS upside relative to consensus.  Here are the highlights from the quarter:

• Total revenues of $802 million declined 1.4% YOY and topped consensus of $780 million, but fell short of our estimate of $820 million.  Company-wide organic revenue declined 1% YOY, which was below the 2% growth rate witnessed in 2Q09.
• North American operations (30% of revenues) continue to be sluggish.  Revenues declined 5.4% YOY,  while operating margins declined 30 bps.
• Total International revenues (70% of revenues) increased 4.7% YOY on a constant currency basis.  As a reminder, BCO should generate a significant tailwind from currency starting with 4Q09 results.
• BCO witnessed a sharp sequential improvement in profitability at its International operations.  Overall divisional operating margins increased 6% sequential to 8.9% excluding the impact of the one-time gain in India.  This was much better than our estimate of 7.5% margins.
• EBITDA of $80.4 million BEAT our estimate of $79 million.
• Reported EPS of $0.70 topped consensus by $0.21. Excluding the one-time gain in India, EPS would have been $0.41. However, using a normalized tax rate of 27.5%, we estimate EPS would have been $0.57, a healthy beat.

BCO will host a conference call today at 11AM, during which we expect management will help investors gain a better understanding of the puts and takes during the quarter.  Management provided full year guidance for divisional EBIT margins of 7.0-7.5%, which suggests that current consensus for 4Q09 remains too low.

For 2010, management has provided initial guidance of low-to-mid single digit organic revenue growth and divisional level EBIT margin expansion of 50 bps. Our “back of the envelope analysis” of management guidance suggests this implies EPS for next year in a broad range of $2.25-$2.40 compared to current consensus of $2.16.

As we highlighted in our previewof BCO’s 3Q09 results the company is poised to benefit from an increase in transaction activity in the diamond sector, which should provide a direct boost to the company’s “value-added services” revenues.    To the extent BCO continues to post positive operating results relative to consensus,  we think the stock could be poised for significant multiple expansion.  BCO shares now trade at 4.2x EV/EBITDA and 11-12x FY09 EPS (adjusted for gains and tax rate).  Shares are remarkably cheap in our view.  Business services stocks that have a long track record of organic growth, generate sizeable free cash flow and produce 20%+ returns on invested capital typically trade between 16-20x FY2 EPS.  On that basis, BCO shares could trade as high as $38-$42/share, which is 50-65% above current trading levels.

As always, please act accordingly….

Disclaimer: The author of this report owns calls in BCO. Positions can change at any time without notice.