Jeffrey Smith Outlines How This Activist Target Can Turn Itself Around

It looks like leaning on Brink’s Company (NYSE:BCO) is Jeffrey Smith‘s latest major move, as the activist investor steps up his interest in the provider of secure logistics and security solutions. According to a recent filing with the Securities and Exchange Commission, Smith’s Starboard Value LP can now be deemed to own 12.4% of the company’s common stock, which includes 4.57 million shares owned directly and 1.45 million shares beneficially owned as part of a cash-settled total return swap agreement with Société Générale. Smith also sent a letter to the company’s Board of Directors, outlining his views on measures to be taken in order to increase shareholder value. Brink’s Company’s popularity among the hedge funds that we track significantly improved during the second quarter, as their combined investments rose to 34% of the company’s common stock.

A star in the world of activist investment, Jeffrey Smith now has the power to move the market, as shares of Advance Auto Parts, Inc. (NYSE:AAP) shot up by 11% following reports of Starboard initiating a 3.7% stake in the company. Smith is also famous for managing to replace the entire Board of Directors of Darden Restaurants, Inc. (NYSE:DRI) in 2014 following a contentious proxy battle. According to its latest 13F filing, Starboard Value manages a public equity portfolio valued at more than $4.34 billion and is heavily invested in consumer discretionary and financial stocks. A new addition to Smith’s top ten holdings was Macy’s, Inc. (NYSE:M), with Starboard disclosing ownership of 2.92 million shares, while its holding of MeadWestvaco Corp. (NYSE:MWV), a global packaging company, was reduced by 13% to 8.83 million shares.

Following activist funds like Starboard is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Starboard can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 36 months since our small-cap strategy was launched it has returned over 118% and beaten the S&P 500 ETF (SPY) by more than 60 percentage points (read more details).

With competitors having heavily invested to improve their logistical capabilities and having significantly reduced costs, Smith laments Brink’s Company (NYSE:BCO)’s failure to keep up and now urges its management to present a “credible turnaround plan”. According to him, the company should look to reduce overhead costs and design a more incentive-based compensation plan for branch- and field-level employees. Smith also pleads for changes in the technology and route logistics employed by the company, improvements that would drive up margins, while also pushing for it to cut down on operations that do not enhance customer value. Aside from that, he urges the board to explore the possibility of a “strategic combination with another global cash logistics company”, should their turnaround efforts fail again.

Up by 21% so far this year, Brink’s Company (NYSE:BCO) ended yesterday’s trading session at $29.70 per share, thus registering a market cap of $1.39 billion. The company pays investors an annual dividend of $0.40, which represents a modest yield of 1.40%. For the three months ending June 30, 2015, Brink’s posted revenues of $760 million, down by 11.5% year-over-year, and earnings of $0.19 per share. Wall Street expects third quarter results to improve, eyeing earnings of $0.38 per share on the back of $762 million in revenues. The company today announced a revision of its forward guidance, reducing its 2015 full-year earnings estimate to a range of $1.40-to-$1.50 per share, from the previous range of $1.55-to-$1.75 per share, while revenue expectations remain unchanged at $3 billion. Brink’s’ management has also revised their 2016 full-year guidance, now expecting earnings to vary between $2.00 and $2.20 per share, while revenue estimates were reduced to $3 billion from $3.4 billion. The company is citing economic weakness in Brazil and volatility in the currency markets as a basis for the revision.

Hedge fund sentiment towards Brink’s Company significantly improved during the second quarter, with the number of funds holding long positions at the end of June increasing to 23, from 15 at the end of the first quarter. The aggregate value of their combined holdings stood at $486 million, up by 21% during the quarter. Matt Sirovich and Jeremy Mindich, the managers of Scopia Capital, are also bullish on the stock, having boosted their stake by 10% to amass 3.98 million shares by the end of June. Mario Gabelli, on the other hand, chose to reduce his exposure to Brink’s Company by 5%, leaving his fund, GAMCO Investors, with 2.73 million shares, according to its latest 13F filing.

Disclosure: none.