Investors in logistics company Brambles Limited (ASX: BXB) received an early Christmas present on Monday when the company issued a trading update that included an upgrade in profit expectations. Brambles' management now expects underlying profit to grow by between 9% and 12% in the current financial year, potentially more than the 9% previously expected by analysts.
Strong Top-Line
Brambles reported that in the first quarter of FY2015, the three months to September, sales revenue grew by 7% in constant currency terms. Impressively, the company expects that revenue growth will accelerate in the coming three quarters to push the full-year sales growth between 8% and 9%.
Healthy Profit Flow-Through
One indication that a company is well positioned for growth is when profit growth exceeds revenue growth. This implies that the company is scalable and requires less per-unit overhead costs as the 'units' of sales increase. In this case; it means that Brambles can make more money from each container or pallet it ships.
Building a Moat
Some of the best investors of our time have made exceptional fortunes by investing in companies with 'moats'. The moat that Brambles is building refers to the difficulty level required for a competitor to either enter the market or take a meaningful amount of market share.
Brambles operates globally and is able to pool customer orders in order to reduce overall cost to both the company and customers. This is a win-win situation and is unique to companies of Brambles' scale. For a competitor to meaningfully threaten Brambles, it would have to either acquire many competing businesses or invest billions in the worldwide network that Brambles already has.
Brambles is adding to its moat by moving into the oil and gas sector via the acquisitions of UK-based oil and gas container group Ferguson. Ferguson will not add meaningfully to the company's profits but increases exposure to the oil and gas sector; further diversifying Brambles' income sources and reducing exposure to discretionary spending.
