Description

Investment Thesis

We believe shares in Brady Corp (BRC) represent a compelling long-term investment as it fits the mold of many of our favorite past investments: a boring industrial company trading at a reasonable valuation while hitting its stride after company-transforming M&A. As long-term investors, we are always on the lookout for industry leaders capitalizing on a strong demand backdrop while focused on capital allocation.  

Brady Corp is a global company operating in the manufacturing of product identification tools, high-performance workplace safety products, and healthcare ID systems.  After a few acquisitions in FY21, the company now provides full track-and-trace solutions. The growing emphasis on safety regulations and compliance requirements has led to a surge in demand for Brady Corporation's offerings, positioning the company as a market leader in the industry. 

The company is led by Russell Shaller who took over the CEO roll last year from the previous CEO, Michael Nauman, who staged an impressive company turn-around with a focus on ROIC. Nauman’s leadership resulted in notable increases in both margins and organic growth, while also engaging in transformative M&A (discussed more in detail below). 

Shaller brings valuable experience to his role, having previously worked at Teledyne as well as successfully leading one of Brady Corp's divisions for seven years. He played a pivotal role in the company's turnaround, and his focus now lies in accelerating growth. Shaller has expressed his intention to explore strategic acquisitions that would complement the current portfolio. It has been evident to us that Shaller maintains a keen focus on ROIC, assuring us that any potential acquisitions will undergo a rigorous evaluation before being executed.

In summary, Brady Corp represents an attractive long-term investment opportunity due to its alignment with our investment philosophy. As a seemingly unassuming industrial company trading at a reasonable valuation, coupled with its recent transformative M&A activities, Brady Corp possesses the potential for profitable growth while maintaining a strong emphasis on efficient capital allocation.

Company Overview:

Brady Corporation has established itself as a prominent player in the identification solutions and workplace safety products industry with a history spanning over a century. From labels and signs to lockout/tagout systems, Brady Corporation provides comprehensive solutions that ensure safety and efficiency in different workplace environments.

In FY21, the company spent $245M on three acquisitions: The Code Corporation, Magic Card, and Nordic ID. These acquisitions were not cheap at a total of ~17.5x EBITDA. However, these purchases filled a large hole in the company’s offering in that it added barcode scanners which finally allowed the company to sell complete solution sets.

The company recently changed its segment reporting from a product-level approach to a geographic one:  

Americas & Asia currently represents around 67% of revenue alongside EBIT margins of ~20%.

Europe & Australia represents the other 33% of revenue with EBIT margins of ~15%.

Product offerings fall into the following primary categories: 

• Product identification:

  • RFID and bar code scanners used for industrial tracking

  • Product labeling and printing systems

• Safety and Facility Identification:

  • Safety signs, pipe markers, labels, etc.

  • First aid products

• Wire identification: 

• People identification products: 

  • Name tags, badges, lanyards, etc.

  • Access control systems

• Patient/Healthcare identification:

  • Wristbands, labels, printing systems, and other products used in healthcare settings for patient tracking and safety monitoring.

Financials and Valuation

The company recently updated its guidance for FY23 by increasing the adjusted (ex-amortization/GoS) EPS range to $3.45-3.60 with one quarter left to go. Our estimate is just about the top end of the range (consensus is $3.53) and would result in a PE of 13.3x. At the same time, the company currently possesses a net cash position on its balance sheet (~$84M) and has been returning cash to shareholders via share buybacks and dividends (~2% yield on the current share price). In FY22, the company returned a total of over $150M (6% of the current MCap) to shareholders. The company continues to buyback its stock and we think there is room for increased returns to shareholders considering the state of the balance sheet.  

We think the company is really hitting an inflection point and should grow in the mid-teens over the next few years as the FY21 acquisitions are starting to really hit their stride with revenue and cost synergies bearing fruit. Our estimate is for over $4/share in EPS in FY24, which results in a forward PE of less than 12x. We believe this valuation is reasonable-to-cheap considering the quality of the business. Our expectation is that this will likely get a valuation re-rating to the mid-teens while earnings continue to grow steadily resulting in 10-15% compounded return over the next 5+ years.  

Major Risks

- Raw material/personnel cost inflation is a headwind but this is an industry issue and most of the solutions sold by the company are not discretionary.

- Capital allocation is a risk in that there is significant room to maneuver on the balance sheet. While the company has taken a break from large-scale M&A, the CEO has mentioned that he will likely look to add to the portfolio when he finds the right targets. The company has been returning cash to shareholders and we trust the capital allocation decisions of the current management team.

Catalyst

- Continued margin improvement/capital returns

- Potential acquisition of the company if valuation does not improve significantly