This report was originally published on 2/3/10.

Normally when a non-financial services company issues an earnings release that is more than 25 pages, it usually is cause for significant concern.  However in the case of BCO (26.9↓1.14%), the lengthy 4Q09 press release has been greeted with “open arms” given the number of changes the company has undergone in the past 3-6 months.  Overall, on an “adjusted” basis BCO’s revenues and EPS of $788 million and $0.41 exceeded expectations on the top-line ($760.8 million), but fell short of consensus EPS of $0.49.  BCO reported GAAP EPS of $2.50 which includes: 1) the benefit of a tax benefit of $117.8 million due to the release of a valuation allowance on deferred tax assets, 2) A gain on the company’s existing ownership of its Indian subsidiary of $13.9 million in which BCO acquired a majority stake during 4Q09, and 3) the negative impact of the company’s decision to repatriate cash from its Venezuela subsidiary at the parallel exchange rate (charge of $22.5 million) and to report segment operating results based on the parallel exchange rate.  Interestingly enough, the  company did not exclude $6 million in severance costs during the quarter for its insurance operations and an addtional $3 million in higher legal costs for its North America segment in its adjusted EPS calculation.  If we add back those “one-time” costs, adjusted EPS would have been $0.52 for the quarter  compared to consensus of $0.49.

BCO Happily Says Goodbye to 2009

2009 was a particularly difficult year for BCO on many fronts.  Just to review, here are the issues the company faced in the past 12-months:

• A deeply underfunded pension following the 2008 market collapse, which caused the company to contribute $150 million to its U.S. pension plans during 3Q09.
• Political unstability in Venezuela which led management to the decision to repatriate cash from its Venezuelan subsidiary at 5.92 bolivar/dollar compared to what used to be the stated exchange rate of 2.15 bolivar/dollar.
• An incredibly weak demand environment for diamonds and other precious jewelry, which severely hampered financial results for the company’s higher margin value added services
• Competitve pressures in Europe, the company’s single largest operating segment, which hurt organic growth and operating margins over the course of the year

In light of the above, it shouldn’t come as a total surprise that the stock underperformed the market and its peers, declining 10.1% for all of 2009.  As challenging as 2009 was for the company, BCO did generate roughly 1% organic growth, a reasonably impressive accomplishment in this economic environment, in our opinion.  More importantly, we think the company exited the year with a number of tailwinds that should lead to improved financial performance over the coming years, including:

• No expected cash contributions to its U.S. pension plans in 2010 and 2011.  BCO will not be required to make a cash contribution to its U.S. pension plans until 2012 at the earliest, depending on the performance of fund assets.  This should enable the company to use more of its free cash flow to pursue strategic acquisitions.
• Product momentum for CompuSafe, BCO’s proprietary cash management system for retailers continues to grow.  According to BCO,  the installed base of CompuSafe increased from 7,440 at the end of 2008 to 10,300 as of 12/31/09, which represents 38% YOY growth.  CompuSafe generated approximately $60 million in revenues in 2009, accounting for 2% of BCO’s total.  Management expects the installed base of CompuSafe to increase 30-40% in 2010 and has started to roll the program out internationally.  We anticipate CompuSafe could account for 4-5% of BCO’s revenues within three years.  The product increases customer traction for BCO and generates higher margins.
• Strategic acquisitions in Brazil, Russia, India, and China should enable BCO to deliver historical growth rates over the next 3-5 years.  BCO continues to expand its global platform and has established market leadership in many countries in Latin America. In the past 12-18 months, BCO has taken steps to expand its platform in Asia through acquisition.  Demand for cash-in-transit and cash logistics services are in their nascent phase in countries such as China, India, and Russia.  We think BCO will continue to identify acquisition opportunities in those countries.  Asia only represented 3% of the company’s revenues in 2009, but should expand rapidly through a combination of organic growth and additional acquisitions.  Historically, BCO has delivered mid-to-high single digit organic revenue growth due to a general increase in cash in circulation and rising demand for cash logistics services. We expect the company to generate historical growth rates on a sustained basis as its exposure to emerging markets increases and CompuSafe gains further traction.

In 2010 BCO Should Get Back to Basics – Steady Organic Growth and Solid FCF Generation

Although it would be premature to characterize BCO’s largest end-markets as favorable, there are increasing signs that economic recovery in North America and Europe could lead to stronger cash-in-transit volumes for BCO, and perhaps more importantly greater demand for the company’s higher margin value-added services such as secure diamond and jewelry transport.  We think 2010 will be a year in which the “noise” surrounding BCO’s results diminishes and the company gets back to basics by delivering steady organic growth and strong free cash flow generation.  Management has provided initial 2010 guidance for low-to-mid single digit organic revenue growth and segment operating margins of 7.0-7.5%.  In the table below we detail management’s initial guidance range across a variety of assumptions and outline its implications for estimates relative to consensus:

Source: PAA Research

We would characterize management’s initial revenue guidance as relatively conservative given that it does not appear to factor in any improvement in the velocity of jewelry transactions.  Overall, management’s guidance is above consensus revenue expectations, and falls slightly short of current consensus of EPS.  However, it is important to note that minority interest is a huge swing factor in the company’s EPS.  We have assumed that minority interest will increase approximately $6 million on the year based on the company’s increased ownership of its Indian subsidiary  (now consolidated) and better performance from divisions in which the company does not have complete ownership.

When we initially introduced BCO as a investment idea approximately 6-7 months ago, there were four factors that made the stock attractive in our view:

1. Cash is a growth business. Global cash in circulation, continued retail banking branch expansion globally, proliferation of ATM’s and the CompuSafe product cycle should all drive mid-to-high single digit organic revenue growth for BCO.
2. BCO should generate significant free cash flow even after pension contributions. The company’s financial flexibility is unmatched in its peer group.
3. Brinks will benefit substantially from dollar weakness.
4. BCO’s valuation is cheap.

It appears that BCO is on track to deliver strong organic growth and robust free cash flow generation in 2010, which should illuminate the value of the stock to investors.  As the table below demonstrates, BCO shares remain remarkably cheap for a company that has strong secular growth characteristics, robust free cash flow, and high returns on capital.

Source: PAA Research

2009 was certainly a bumpy, if not frustrating ride for BCO shareholders.  However, the worst is now behind the company and it appears BCO is on the cusp of returning to its historical organic revenue growth and free cash flow generation profile.  We think the stock can trade to the low to mid 30’s which would represent a 16-18x multiple on our FY11 EPS estimate of $1.98 as noise surrounding the company subsides.

As always, please act accordingly….