While many investors regularly chase the latest fad and the next "hot" sector, it's amazing just how dependable and steady growing the pallet business has been for one company.
Brambles Limited (ASX: BXB) operates the world's largest pallet pool as well as major crate and container pools and has achieved a total shareholder return (TSR) of 17.8% per annum over the past five years.
It's a great example of how developing a market leading position in a niche area can make for a superb cash generating business.
With Brambles up 22% in the last year and hitting a new one-year high in the last week, some investors will be kicking themselves that they haven't bought Brambles already.
While it's understandable to be disappointed about a missed opportunity, there are plenty of reasons why the stock could still be a buy today.
Despite its size and market share, for the six months ending 31 December 2015, Brambles achieved an 8% increase in sales (at constant currency) and a 13% rise in earnings per share (again, at constant currency).
The fastest growing region was the Americas which achieved underlying profit growth of 14%. The only disappointments were lacklustre profit growth of 2% for reusable plastic crates and a 20% decline in profit from containers.
Importantly, given the strong first half, management upgraded guidance for the full year from sales and profit growth of 6%-8% to 8%-10%. Not bad for a blue chip!
The solid first half operations led to a 0.5 cent increase in the interim dividend with shareholders no doubt hopeful that the final dividend will also be raised. The rise in interim dividend was in stark contrast to other blue chips such as Woolworths Limited (ASX: WOW) which was forced to cut.
Risks
Even the most defensive of businesses is not without risk if you pay way over fair value for it.
Right now Brambles trades on a financial year 2017 price-to-earnings ratio of 24 times. That's high, but considering the defensive nature of Brambles' earnings and its growth prospects, it's arguably still a reasonable price to pay.
