The Brambles Limited (ASX: BXB) share price got a boost today after Citigroup upgraded the stock as it believes the logistics group's operating performance is at a turning point.
The BXB share price jumped 0.5% to a two-month high of $10.72 in late afternoon trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.6% into the red.
However, the Brambles share price could come under pressure next month as its first half FY19 results is likely to show ongoing cost pressure and lack of operating leverage.
Brambles at transition point
But don't let this put you off. Citigroup believes Brambles is staging a turnaround in the current half and has upgraded the stock to "buy" from "neutral" as it upped the price target on the stock to $12.10 from $11 a share.
"Our tracking of Brambles key input costs indicates inflation in the US is showing signs of abating. Whilst Trucking costs remain high, we think a shift to more 'dedicated' capacity can lift CHEP Americas underlying EBIT margins by 80bps to FY22e," said Citi in a note released yesterday.
"Furthermore, industry rationality should allow Brambles to retain greater automation savings than we originally forecast, driving margin accretion of ~310bps. Overall, we forecast CHEP Americas underlying EBIT margins can return to ~19% by FY22e."
CHEP Americas is Bramble's US pallet business. This division has been a thorn in the side of investors due to rising lumber costs (its pallets are made from wood), misuse of the pallets by customers and loss of the pallets.
But management has been working on rectifying the problems with the division and Citi believes the earnings headwinds are fading, which should lead to double-digit earnings growth from FY20.
"We lift our valuation premium to global peers for the CHEP Americas business to 35%, reflecting the improving growth outlook as inflation fades and automation drives margin accretion," said Citi.
"We lift our PE-rel [price-earnings relative] premium to the ASX200 ex. Resources from 20% to 30% for Brambles reflecting the double-digit EPS CAGR over the next 3 years."
Foolish takeaway
I too believe that Brambles has more room to climb in 2019, particularly if US economic growth can continue to lead the develop world.
The company is a great way to gain exposure to economic activity in the world's largest economy and will benefit from a weaker Australian dollar when its profits are translated into the local currency.
Brambles isn't the only US-exposed stock that I am betting on in 2019. I also like the BlueScope Steel Limited (ASX: BSL) share price, Aristocrat Leisure Limited (ASX: ALL) share price and Reliance Worldwide Corporation Ltd (ASX: RWC) share price.
