Is Boring Beautiful?

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Is Boring Beautiful?

It would be an understatement to say that industrial label and sign maker Brady Corp. has a low profile in the investment community. Eric Heyman explains why a low profile in this case can translate into high potential.

It’s fair to say that Brady Corp. doesn’t initially leap off the screen as a pulsequickening investment idea. Founded in

1914, the Milwaukee-based firm sells a wide variety of labels, signs, printing systems and safety devices used in workplaces worldwide. Think employee IDs, identification labels for wiring in airplanes, warning signs in manufacturing plants.

Its website touts the appearance of Brady signs in the movie Jurassic Park, which premiered in 1993.

Brady’s common shareholders have no voting rights – those are held by two descendants of founder W.H. Brady – and the stock is barely followed by Wall Street.

That’s not particularly surprising given the share-price trajectory: over the past ten years, a period in which the S&P 500 is up

77%, Brady shares have actually declined, from just over $30 to today’s $27.

So why is Eric Heyman, co-portfolio manager of the Olstein Strategic Opportunities Fund, high on Brady’s prospects?

There’s no exciting new product or boldstroke strategic initiative, just a muchneeded corporate reset underway that he expects to pay off handsomely for investors. “Sometimes the quiet turnaround is all you need,” he says.

Brady starting in the mid-2000s went on a buying binge, making 24 acquisitions from 2006 through 2013. The purchases typically made sense in solidifying a market position or expanding in a new geography, but the financial payoffs were slow in coming because integrating the new operations took a back seat to making the next deal. While overall operating margins started to decline, the company at the end of 2012 made its first blatantly bad deal, paying $300 million for Precision Dynamics Corp., a maker of ID products for the healthcare sector. In its fiscal year ending last July, Brady took nearly $150 million in impairment charges related to PDC.

I N V E S T M E N T S N A P S H O T

Brady Corp.

(NYSE: BRC)

Business

: Provider of identification and safety products used in the industrial, construction, education and medical-services sectors.

Share Information

(@4/29/15):

Price 27.08

52-Week Range

Dividend Yield

20.98 – 30.86

2.9%

Market Cap $1.39 billion

Financials

(TTM):

Revenue

Operating Profit Margin

Net Profit Margin

BRC PRICE HISTORY

$1.22 billion

9.5%

(-5.0%)

20

20

2013

The accumulating bad news led to the naming of Molex Inc.-alum Michael Nauman as CEO last August, and his message has been straight from the back-to-basics playbook: consolidate manufacturing fa-

Valuation Metrics

(@4/29/15):

BRC Russell 2000

P/E (TTM) n/a 70.5

Forward P/E

(Est.)

18.3 19.3

Largest Institutional Owners

(@12/31/14):

Company

Ariel Inv

BlackRock

Franklin Templeton

% Owned

9.3%

8.2%

7.0%

Short Interest

(as of 4/15/15):

Shares Short/Float

2014

3.4%

15

35

30

10

25

5

20

THE BOTTOM LINE

After years focused more on completing acquisitions than actually making them work, the company’s current back-to-basics approach is both necessary and welcome, says Eric

Heyman. He pegs the shares’ current fair value at $37, without assuming the significant benefit he expects over time as operating margins return to pre-acquisition-binge levels.

Sources: Company reports, other publicly available information

2015

(over please)

Close

U N C O V E R I N G V A L U E :

Brady Corp.

cilities, better manage working capital, reduce overhead costs, prioritize research and development spending, increase customer service and solidify the balance sheet. The firm’s dedicated deal team –

“in my experience, not a good idea,” says

Heyman – has been retired.

Not surprisingly, the market has been slow to assume the best when it comes to

Brady. Heyman pegs the stock’s fair value today at $37, 18.5x his $2 per share estimate of normalized free cash flow, which adds back excess depreciation relative to actual capital-spending needs. The real upside, however, will come if CEO Nauman is successful in increasing operating margins from less than 10% today to the

13-14% level achieved prior to the acquisition binge. “That’s not a stretch goal at all,” says Heyman, “making it a nice free option to have on the upside.”

VII

From the April 30, 2015 issue of Value Investor Insight, reprinted with permission of Value Investor Media, Inc. (www.valueinvestorinsight.com).

The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. References to securities are not buy or sell recommendations, but are intended to be descriptive examples of the Fund’s investment philosophy. Do not make investments based on the securities referenced. As of 12/31/15, the Olstein Strategic

Opportunities Fund maintained a position in the following securities referenced above, and is subject to change: Brady Corp. (2.9%).

This information should be preceded or accompanied by a current prospectus, which contains more complete information, including investment objectives, risks, charges, and expenses of the Olstein Strategic Opportunities Fund and should be read carefully before investing. A current prospectus may be obtained by calling (800) 799-2113 or by visiting the Fund’s website at www.olsteinfunds.com.

An investment in a portfolio containing small- and mid-cap companies is subject to additional risks, as the share prices of small- and mid-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information.

The activist strategy invests in stocks of underperforming companies and any shareholder activism might not result in a change in performance or corporate governance.

These stocks could also experience less liquidity and higher share price and trading volume volatility than stocks of other companies.

Not FDIC insured / Not bank-guaranteed / May lose value. Distributed by Olstein Capital Management, L.P., member FINRA.

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