Brady currently trades at $71.72 per share and has shown little upside over the past six months, posting a small loss of 2.6%. The stock also fell short of the S&P 500’s 5.4% gain during that period.
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Why Is Brady Not Exciting?
We're cautious about Brady. Here are three reasons why we avoid BRC and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand Safety & Security Services companies by analyzing their organic revenue. This metric gives visibility into Brady’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Brady’s organic revenue averaged 1.6% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
2. Fewer Distribution Channels Limit its Ceiling
With $1.46 billion in revenue over the past 12 months, Brady is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Brady’s margin dropped by 3.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Brady’s free cash flow margin for the trailing 12 months was 12.2%.
Final Judgment
Brady’s business quality ultimately falls short of our standards. With its shares underperforming the market lately, the stock trades at 14.6× forward P/E (or $71.72 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
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