Should You Buy Brambles’ Shares at this Price?

What does Brambles do?

Brambles [ASX:BXB] is a global logistics company providing companies with key infrastructure to efficiently manage their supply chains. Specifically, Brambles provides companies pallets, containers and crates to move their goods from the point of manufacture to warehouses or the point of sale.

What’s happening to the Brambles share price?

Today, Brambles announced a revenue and earnings downgrade based on weakness in its US business. Brambles said destocking by US retailers and a return of pallets late in the half year to 31 December was behind the downgrade.

By early afternoon, the share price had declined nearly 16%, to $10.30, down nearly $2 per share from Friday’s close.

As you can see in the share price chart below, Brambles’ share price is now at the lowest point since the start of 2016, when fears of a global slowdown ravaged share prices around the world.

Source: BigCharts

A new low for a stock price is bad news. Plenty of people like to buy after a significant price fall, but it is rarely a smart move. The share price decline reflects a change in value, and not a ‘bargain’ or discount as many people like to think.

What now for BXB? 

Part of the reason for today’s sharp share-price fall was BXB’s expensive valuation leading into the announcement. The stock traded on a price-to-earnings multiple of nearly 22 times 2017 forecast earnings, which is well above the market average of around 14–15 times.

Whenever a company announces an earnings downgrade, and it has an expensive valuation, the share price always suffers heavily.

The question for shareholders now is this: Is this a ‘one-off’, or is it a sign of more structural weakness in the business?

For example, we know that traditional retailers in the US are struggling with the onslaught by Amazon’s retail model. For BXB, this means more goods moving through a much shorter supply chain, meaning less demand for its pallets and containers.

But it’s way too early to tell what the real issues are. In the meantime, I suggest letting the market (that is, the stock price) guide you. As the stock is now in a definitive downtrend, I suggest staying away for now. Today’s fall might just be the start of further share price destruction.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

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Greg Canavan
Editor, Markets and Money