The Brink's Company (NYSE:BCO)

There are two considerations to look at with BCO, the company itself and the market sector in which they operate. Lets start with the market sector first.

Market Conditions;

There are three main competitors in the cash handling, or secure transport sector, namely Brink's, Loomis, Garda and G4S.

Garda is loaded with debt and looking to gain market share in an effort to find some profit. Garda's footprint in the secure transport field is the result of purchasing a number of smaller companies in the US, a of which were profitable and many that were only marginally profitable. They have, in my opinion, had only limited success in merging these different companies into a single well run unit. All of these companies were small private companies, each with it's own operating culture and philosophy, but mostly they operated with the idea of lower pricing and cheaper operating costs. The owners were typically owner / operators and were deeply involved in the day to day operations. The owners were looking for an exit strategy, which Garda provided. I am not aware of any of these owner / operators still working for Garda, so a large knowledge base disappeared with the purchase of each company.

Loomis;

Loomis in the US was originally the consolidation of Wells Fargo Armored Service and Loomis Armored in the mid to late 90's. Loomis effectively bought WFAS before they had to enter into bankruptcy. The tenuous financial conditions of WFAS were brought about by the big box concept, meaning lowering prices to gain market share, which meant lowering costs in order to retain profit. The problem with this idea in the armored services industry is that two areas account for about 60% of all costs; labor and vehicles. WFAS tried to cut costs by running one man trucks, which resulted in more and larger cash losses and therefore increased insurance costs. They also switched to using retrofitted armored vans instead of customer built armored trucks. The end result was much higher vehicle expenses after about three years. Short term operating with one man trucks and using armored vans reduced costs, but these savings were short lived, and as is typical, it all caught up with them. Loomis 'merged' with WFAS with operating control. One of their first actions was to begin a series of significant rate increases, which brought the industry out of a decade long pricing war. In 2001 then Loomis Fargo & Company was bought by Securitas, a Swedish firm.

I am not nearly as familiar with G4S, so will simply say that while they are huge, in the US I believe that they sub-contract out all of the armored services. In the other parts of the world, I believe they are major players and compete strongly in the industry. My experience has been exclusively in the US market.

Today, the market is such that the entire market has become nothing more than a commodity, the same as buying a toaster. There is little negotiating of contracts, instead often services are put out for bid on the internet using on-line auctions. It has become extremely cutthroat in every aspect. Rates today are less than they were ten years ago. One of the most profitable area was long ATM servicing, but with the advent of imaging ATMs, much of this revenue is now gone permanently. The cash servicing of ATMs has also been hit hard as banks are looking to cut their costs. An average rate ten years ago to replenish at ATM was $60 or so, depending on the location. Today the rates are often in the low $40s. Another area that historically provided solid margins was cash and coin delivery to banks and credit unions. A rate of $35 - $50 per trip was reasonable ten years ago. The average today is closer to $25 for the same work.

Brink's the company;

Finally, there is Brink's, the oldest, I believe of all of the companies. Founded in 1859 Brink's has historically been a strong competitor in the industry, but they are struggling today to find a way to remain alive. In the US, the competition is so tough that Brink's continues to lose market share. Over seas, it is a different story, but since the US makes up such a large portion of their business, I do not see how they will remain strong without getting positive results here. One of the main difficulties that Brink's faces is that (and this is my opinion only) in the mid-level management and higher there is an attitude of 'we deserve our customer's work because we are 'Brink's'. I think this may be slowly changing as more of the 'old guard' is laid off or retires, but the change is similar to the rate of climate change, measured in decades and not minutes.

The situation at Brink's is serious enough that the CEO of many years, Michael Dann, recently retired. I do not believe he went of his own volition, but was forced out. The North American president, Larry Rodo, likely doesn't have much time left to effect the changes he is trying to put in place before he will be let go as well. Two years ago, the push at Brink's was training, and information technology upgrade. Over the past two years millions have been spent on these two fields. The idea being that customers would respect and appreciate (meaning pay higher rates) the better trained employees at Brink's. I do not believe that this has happened. Instead Brink's cost structure has simply gotten worse. Today, it takes approximately three full weeks of training before a street employee, called a messenger, to start producing. The first month or two will include many mistakes as they continue to learn, meaning added cost to each branch. In comparison, Garda's training is 1 - 2 weeks. The estimated cost to hiring and train a new employee at Brink's is $5000 - $6000. The real issue is that most branches operate with a 28 - 40% annual turnover rate.

Brink's spent about $1.5 million renovating their US headquarters building to accommodate what they call Brink's University. It was designed to allow for training multiple groups at the same time. The first ones through the training were branch managers, of which all have now completed the three week course. The course itself was not impressive, in fact I felt it was a significant waste of time and money. They are now talking about putting many, if not all, of the supervisors through a similar, though shorter course. In light of their most recent results, this may have changed.

On the subject of IT, Brink's was so far behind the curve compared to other companies, that they were spending millions each year trying to catch up. That is until a month ago, when I was told (this is second hand so please keep that in mind) that most of the IT department was let go. I do not know if they were simply cleaning house, or deciding to just cut costs.

To summarize, the market is perhaps the worst it has ever been. Garda and Loomis are quoting rates that are at or below their true cost. Brink's is trying to compete, but I think they may have the highest cost structure of all the companies. Brink's as a company has serious problems that they are slow to address. They have a much higher overhead cost than any of the others, I believe, but don't seem to believe they need to change. If you back out the overseas profit and revenues, Brink's is abysmal. The last number I heard was that the US profit was less than $2 million.

Finally, what impact will smart phones have in the coming five to ten years? More and more they are used to pay for everything, which means that less and less cash will be used. Check usage continues to drop and Brink's still receives significant revenue off from processing of checks.

I see little to no upside, while seeing strong headwinds that I believe will continue to drive profits down for Brink's. The only possible solution is if Garda or Loomis is forced into bankruptcy and the market conditions improve significantly.

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