Brady Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products, with a focus on high-performance materials.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Brady operates in two segments: Identification Solutions (IDS), which focuses on products used in identification and tracking of items, and Workplace Safety (WPS), which focuses on products related to worker safety and industrial compliance.

Business Overview

Brady Corporation (BRC) operates in two main segments:

  1. Identification Solutions (IDS): This segment focuses on designing, manufacturing, and marketing a wide range of high-performance identification solutions. These include:

    • Specialty labels and tapes
    • Printers and software
    • Safety tags
    • Signs and identification products
    • Automatic identification systems and devices

Key industries served under IDS are: electronics, telecommunications, manufacturing, electrical, health care, aerospace, mass transit, and supply chain.

  1. Workplace Safety (WPS): This segment offers products and services aimed at enhancing worker safety, compliance, and operational performance, including:

    • Lockout/tagout solutions
    • Safety signs and markers
    • Personal protective equipment
    • First-aid products

Key industries served under WPS include: oil and gas, petrochemical, construction, mining, and government.

Industry and Competitive Landscape

  • Diverse Industries: Brady serves a wide range of industries, from heavy manufacturing to health care. Each sector has different requirements, but the need for effective identification and safety solutions is common.
  • Competition: The competitive landscape is fragmented, with numerous global and local players. Within each of its segments, Brady has well established competitors. For example, Brady’s peers in the Identification Solutions space include companies such as Avery Dennison, 3M, and Zebra Technologies. In the Workplace Safety segment, competitors include Honeywell and MSA Safety. Competitive forces include price, product features and quality, and distribution capabilities. Competitors are not afraid to undercut each other’s price to gain a market share.
  • Growing Regulatory and Compliance Requirements: The demand for safety and compliance products is increasing due to stricter government regulations and increasing demand from companies to improve their safety standards.

This provides an opportunity for Brady’s WPS segment, as companies seek comprehensive safety solutions, leading to more growth and customer loyalty.

What Makes Brady Different?

Brady’s competitive advantage resides in its ability to provide customized and high-performance solutions. This is achieved through its proprietary materials science, in-house manufacturing capabilities, and extensive distribution network.

  • Brand Reputation: Brady has a strong brand reputation for quality and reliability, which is reflected in customers’ willingness to pay a premium for their products.
  • Global Footprint: Brady is a truly global company which is able to leverage its manufacturing and distribution strengths to serve customers in different countries, unlike competitors that are primarily concentrated in a single region or country.
  • Innovation: Brady is focused on new product development and product innovation. Research & Development has been historically a major focus of the company.

Financial Analysis

  • Revenue Growth: Over the past few years, Brady has seen a slow but steady increase in its revenues, however, this has slowed down considerably due to high inflation, increased operating costs and difficult market conditions.
  • Profitability:
    • Gross margins are between 40% to 55% in the last few years and have varied depending on which segment contributed more revenue in a particular period.
    • Operating profit margin, has suffered due to cost inflation and reduced productivity of operations. Operating margins in fiscal 2023 have declined from their pre pandemic highs due to ongoing cost pressures.
  • Cash Flow: Free cash flow has been positive over the last 3 years but has decreased considerably from 2021 to 2022, and 2022 to 2023. In 2023, free cash flow was at a low due to increase in investment.
  • Debt and Leverage:
    • The debt-to-EBITDA ratio was around 1.5 in 2023, which is not very high. Also, most of the company’s debt is long term debt and should not pose a risk to the company in the near future.
    • The company has been issuing debts with fixed interest rates for longer maturity which should protect it from adverse interest rates fluctuations.
  • Capital Structure: BRC’s capital structure has a mix of debt and equity, which gives them enough flexibility to adapt to changing economic conditions.
  • Return on Invested Capital (ROIC):
    • ROIC has been fairly consistent between 13 and 16 % from 2020-2022, showing strength in its business operations.
    • In 2023 however, ROIC declined to 11.5%, this was mainly because of lower operating margins and higher working capital requirement.

Legitimate Moat Risks and Business Resilience

  • Economic Cycles: BRC’s business, despite being in many sectors, is tied to macroeconomic cycles. If there is a slowdown in manufacturing or the overall economy, BRC’s business will suffer considerably.
  • Competitive Pricing Pressures: In the commodity or highly competitive market segments, competition can drive down profit margins and make it difficult for BRC to maintain its high margins.
  • Technological Disruption: Although BRC’s business is not purely tech based, they are dependent on various technologies which, if rendered obsolete, would decrease their earnings.
  • Increased Input Costs: BRC is sensitive to changes in raw material prices. For example, increases in the costs of resins, adhesives, and paper can reduce profit margins.
  • Supply Chain Issues: BRC has faced supply chain issues in recent quarters, which have increased shipping costs and led to delays in delivering products to customers.
  • Impact of Inflation: High inflation rate can impact company’s operating margin by increasing production costs, shipping costs, and employee wages.

To overcome the above threats, BRC has been investing in cost optimization efforts, strengthening its supply chain, and focusing on innovation and new product development. For example, BRC has been trying to minimize shipping costs by setting up facilities closer to its customers, and also has been improving productivity with automation and technology adoption.

Despite these risks, BRC has shown resilience by virtue of its diverse portfolio, global operations, strong client relationships, and cost optimization efforts. It has a business model that should be able to sustain a good level of profitability even during difficult market conditions.

Moat Rating: 3 / 5

Brady’s moat is a 3 out of 5. Here’s why:

  • Intangible Assets: Brady possesses a strong brand reputation and also has developed various patents that provide a first mover’s advantage. But at the same time, these patents are not that difficult to get, and this puts some level of limitation to the moat strength of the company.
  • Cost Advantages: While they try and reduce cost with scale, it doesn’t provide a big edge, since many other competitors operate using similar manufacturing methods and have access to similar cheap labor. However, its established global distribution provides some cost edge.
  • Switching Costs: There are also moderate switching costs which have given them pricing power in specialized products like laboratory printers. This provides a stickiness to existing customers, as the cost and effort of switching to another supplier is high.
  • Economic Moat: BRC has a decent, but not very durable moat. The above factors, namely the company’s proprietary products, distribution network, customer lock in, and brand recognition provide BRC with an advantage, however, that may only last for a decent duration, but not for multiple decades. Also, high competitive intensity can lead to erosion of the existing moat.

Understandability Rating: 2 / 5

The business of BRC is only a little above basic and is not that complicated, but it is difficult to keep up with its complex supply chain. The wide portfolio of products, the various geographies it serves, and different regulatory and market standards all add to the complexity of understanding the business.

Balance Sheet Health: 4 / 5

  • Healthy Capital Structure: BRC’s capital structure is balanced with a reasonable amount of debt and enough equity, which gives it flexibility to take on opportunities, while withstanding adversities.
  • Strong Liquidity: The company has a reasonable amount of cash to meet its day to day operations. It also has access to revolving credit facilities to draw funds when needed.
  • Good Free Cash Flows: The company is a good cash flow generating business, and has consistently generated positive cash flow which allows for more investment and business expansion.
  • Manageable Debt Levels: The company has a moderate Debt to equity ratio. It also has longer dated debt obligations which mitigates interest rate risk.

Overall, BRC has a reasonably healthy balance sheet. The company can comfortably meet its financial obligations and has the flexibility to take on new opportunities.

Recent Concerns/Controversies

  • Supply chain issues: Has caused a decrease in productivity in manufacturing and also has caused shipping delays. They have however, been taking action to make the supply chain more resilient.
  • High inflation and economic slowdown: has affected demand for products and increased costs, impacting margins. They continue to be vigilant and are taking proactive action to reduce costs, and manage these headwinds.
  • Raw Material Prices: Rising costs of raw materials are a constant challenge which the company needs to overcome in order to protect its profitability. BRC has taken steps such as strategic sourcing to manage input costs.
  • Currency Volatility: Fluctuations in the value of currencies have caused an adverse impact to the company’s reported sales and earnings as they do business in many countries. The company is actively hedging currency exposure.

Overall, the management has been actively trying to tackle challenges head-on by taking proactive measures to limit the impact of such challenges on the long-term growth of the company.