Brambles lowers profit forecast

When we downgraded Brambles to Sell back in November, we observed that ‘if we know one thing about business, it's that new managements like to work with a clean slate. This coming year's financial results would be a perfect time to air any skeleton-filled closets, write off extra pallets, and catch up on any delayed capital investment [due to the recent change in management].'

That theory seems to be playing out. Brambles now expects revenue growth of 5% and underlying net profit growth of 3% for the six months to December 2016. Management said the poorer than expected result was due to higher transport and plant costs as US retailers required fewer pallets. The company also noted pricing pressure in its recycled pallet business.

This has dragged down the company's expectations for the full year, with the final result expected to be 'below' prior guidance for constant-currency revenue growth of 7–9% and profit growth of 9–11%. Management said it would provide new earnings guidance on 20 February when the company reports its interim result.

The stock has fallen 15% today but, with the price-earnings ratio still at 22 times 2016 earnings and a paltry free cash flow yield of 1.6%, there still isn't enough value to whet our appetite. We're lowering our price guide; however, with the stock down 13% since we downgraded it on 23 Nov 16 (Sell – $12.05) and a new Sell price of $11, we're upgrading to HOLD.