Brambles (BXB): delivering the goods

The stock in focus this month is Brambles (BXB). At recent presentations, Portfolio Managers have touched on the theme of disruption, looking at the possibility that in some areas larger incumbents may have advantages that are underestimated, and that the ability for new players to take significant market share may be somewhat overestimated. An example of this was brought into focus recently with Brambles, the international logistics company.

For decades, Brambles held a near monopoly position in the international pallets market, providing the platform for consistently growing returns over many years. However, a new competitor, PECO emerged, with a lower quality solution and starting aggressively competing for customers on price, impacting on Brambles’ margins and growth.

This pressure was further exacerbated, as transport and materials (specifically lumber) costs started rising, further pressuring Brambles’ margins. This was reflected in a falling share price, as the market reacted to a challenging, more competitive environment for Brambles.

However, two significant advantages incumbents often have are size and scale. While these price pressures were impacting Brambles, they were having a much greater effect on the insurgent competitor, which was only 25% of the size of Brambles. Eventually, their ability to compete so aggressively on price dissipated, and there was a return to a more rational market.

Brambles have started to expand their margins in the US for the first time in a number of years. While the industry will permanently be more competitive, Brambles have been able to defend their position as the dominant market player, and use their size to both defend their market share and invest in technologies and efficiencies that will benefit shareholders going forward.

Quick Stats:

  • Sales revenue for FY18 topped $US 5.5 bln
  • BXB is looking to demerge IFCO – their fresh food logistics business
  • Major input costs are transport and lumber which grew at 10 and 13% respectively in the US in FY18

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