Brambles still the one

The company has a clear business strategy - to develop existing core businesses in Australia (CHEP pallet pooling, equipment hire, waste management and records management) and to replicate them in Europe and North America. While the Australian businesses are largely mature and account for just less than half of EBIT, they generate the cashflow for the company to build businesses overseas. This financial year alone Brambles plans to spend approximately $750m and yet its net debt to equity remains conservative at 42%.

Core portfolio stock

CHEP in the US is the major driver of profit growth at present (the pallet pool increased total pallets by 50% in the first half). But it's not the only profit driver: CHEP Europe still has room to expand and eventually a pan-European pool will be developed. Records management in Australia and overseas can be grown through acquisition and product development. Waste operations continue to win more contracts and tighter regulations in the US should help Ensco. Australian equipment hire will be boosted this year by the Cockburn takeover.

Brambles' profits have grown at a rate faster than the industrial market and this has propelled share price performance. A relatively high level of confidence in earnings forecasts means that in this case paper valuations are realistic rather than illusory. The stock is not cheap, at around a 20% premium to the industrial market (excluding financial stocks), but this is the historical average premium for Brambles against the industrial market, so it's no more expensive than usual! Definitely a core stock for your portfolio.