Brambles

Brambles has reported a 12% rise in earnings per share to 20.1 US cents for the six months to 31 December on a 4% rise in sales. On a constant currency basis, the rises were 16% and 6% respectively.

That’s a decent performance given the weakness in the global economy and it backs up a strong 2012 full year, in which earnings per share grew 18% on a constant currency basis.

There was also an improvement in cash generation, with free cash flow of $177m in the period compared to an outflow of $95m in the prior half, but it still wasn’t enough to cover dividend payments of $210m.

Brambles is a globally dominant business, but it involves a huge capital base, spread across the world in the form of pallets: they’re expensive to produce and maintain and they’re easy to lose. This means relatively low returns on capital (of 15% in the period, up from 1%), at least for a globally dominant business, and high levels of capital expenditure – of US$949m in the 2012 financial year, for example, compared to operating cash flow of US$1,089m.

The share price is up 28% since 27 Aug 12 (Avoid – $6.73), putting it on a forward price-earnings of almost 19. Today’s result looks reasonable, but the thorn is still prominent in the company’s side and we’d need a much lower price to consider an upgrade. AVOID.