By Victor Reklaitis, MarketWatch
The punishing past month for stocks worldwide has sparked a dash to cash.
It also may have helped create bargains in the cash-handling industry, where bulls see an encouraging—and underappreciated—push into higher-end services.
The industry’s bread-and-butter for decades has been armored vans that move bags of money from stores to banks, as well as other traditional cash-management offerings. Such services aren’t exactly a high-growth area, given the relentless shift to payments made with a card or mobile app.
But cash-handling companies are adapting by selling end-to-end solutions to retailers, along with high-tech safes. In addition, further deal-making and consolidation could help boost returns for the major players’ shareholders.
This global industry’s “Big Four” are the United Kingdom’s G4S /zigman2/quotes/202248409/delayed UK:GFS +1.57% , Sweden’s Loomis , Spain’s Prosegur Compañia de Seguridad /zigman2/quotes/209200345/delayed ES:PSG +1.97% , and U.S.’s Brink’s /zigman2/quotes/203540504/composite BCO +0.89% , according to UBS analysts. G4S and Loomis could be the best plays. Each trades at about 14 times estimated forward-year earnings, well below Prosegur’s multiple of 24 and Brink’s price/earnings ratio of 20. G4S is UBS’s favorite; the Swiss bank has a Buy rating on it, with a price target of 310 pence ($4.37), implying a rally of more than 20% from the recent print around 255 pence.
“We believe G4S has developed closest to what we regard as a complete end-to-end solution for the market,” UBS analysts Bilal Aziz, Bosco Ojeda, and their colleagues wrote in a recent note, referring to G4S’ Cash360 offering, which lets retailers outsource their backroom cash operations. Nearly all of Walmart’s /zigman2/quotes/207374728/composite WMT +2.29% U.S. stores have a Cash360 machine that counts bills and digitally deposits money. Walmart’s embrace means this offering has “passed its litmus test,” UBS reckons.
G4S isn’t a pure play on cash handling, since it generates most of its revenue from providing private guards and other security services. To be sure, the company is still remembered in Britain for high-profile flops, such as its failure to provide enough security guards for the 2012 London Olympics, forcing U.K. military personnel to step in. But the market might be underestimating its cash-handling business. “We believe the cash assets are [about] 30% undervalued, relative to pure-play listed peers,” the UBS analysts wrote. They see potential for a sale or IPO for the cash-handling unit, which they estimate “could unlock +50p of value.”
Loomis looks likely to catch up to G4S and its Cash360 offering, the UBS team adds, highlighting the Swedish company’s recent move to boost its software capabilities. They’re also upbeat on Loomis’ SafePoint smart safe, which “acts like a reverse ATM.” “The major benefit for the retailer is that, once daily cash has been deposited into SafePoint, the bank adds that amount to the client’s account within hours,” they write. “Loomis has seen strong double-digit growth in volumes for its SafePoint solution.”
Loomis shares have slumped this year, weighed down by worse-than-expected quarterly results that came out on Jan. 30. Weakness in Europe, especially France, was largely to blame. But Goldman Sachs analysts argue that the company is addressing negative trends in Europe’s third-largest economy.
Goldman has a Buy rating on Loomis, which was spun off a decade ago from Swedish security firm Securitas /zigman2/quotes/203151739/delayed SE:SECU.B +1.31% . The bank’s price target is 395 Swedish kronor ($49.60). That implies a rally of more than 30% from the recent quote near SEK288. SafePoint installations also disappointed, but look set to improve. “While Loomis missed the annual target of SafePoint rollouts of 5,000, installing 3,755, the company had previously flagged the negative impact from the U.S. hurricane season,” Goldman’s Milo Beunk and her colleagues wrote recently. “We continue to believe that the long-term opportunity remains.”
The other Europe-based player among the Big Four— Prosegur—doesn’t look like a great bet, especially given its relatively lofty valuation, say UBS analysts. They have a Sell rating on the stock and a price target of 4.80 euros ($5.99), more than 20% below the recent €6.50. “Prosegur is a well-managed, family-owned company with a good technological edge and strong exposure to LatAm,” they say. But the Spanish company is “excessively exposed” to conventional services, and this “will weigh on growth prospects.”