Brambles (ASX: BXB): Strong Recovery, but Can It Withstand Another Tariff Shock?

Brambles Limited (ASX: BXB) is a well-known global supply chain logistics expert specialising in the sustainable movement of goods, with its iconic set of reusable pallets, crates, and containers serving as the backbone of global supply chains across the consumer goods, packaged food and beverage, fresh food, dairy, and horticulture industries. The company operates across approximately 60 countries worldwide, with its business heavily tied to global trade flows, making it sensitive to tariffs and geopolitical changes.

During Donald Trump’s presidency, the imposition of tariffs had a significant impact on Brambles’ financial performance, with its share price fluctuating considerably. However, over the past six months, the company has staged a solid turnaround, delivering great returns for shareholders. The big question now is whether Brambles can maintain this momentum or if it will once again fall victim to another tariff shock that could disrupt its growth.

 

Brambles’ Business Model: A Logistics Powerhouse

Brambles operates primarily through its flagship CHEP division, which focuses on the pooling and rental of pallets and containers. This business model allows manufacturers, retailers, and distributors to access Brambles’ pool of supply chain assets instead of purchasing them, lowering costs and increasing efficiency. The company is indispensable to global trade, primarily focusing on the fast-moving consumer goods (FMCG), retail, and agricultural industries.

Through CHEP’s pooling model, pallets and containers are re-used repeatedly within the supply chain. This provides a more sustainable option than single-use packaging, minimising waste and helping companies reduce their carbon footprint. This model resonates with the global push toward greener logistics solutions. Brambles has experienced strong revenue and income growth, aided by economies of scale from its global network of depots and service centres, which efficiently recover, repair, and re-hire pallets.

As a vast network, Brambles’ operations are influenced by macroeconomic factors such as trade policy, raw material prices, and currency fluctuations. Taxes on imports and exports can directly affect its operating costs, especially in markets like the United States and Europe. Additionally, rising fuel and transportation costs may impact operational expenses, affecting the company’s overall margins.

Brambles’ Strong Recovery Over the Past Six Months

After experiencing turbulence in recent years, Brambles has seen a resurgence in its share price. Several factors have contributed to this rally:

Strong Financial Performance

Brambles’ recent earnings reports confirm that sales grew strongly due to pricing initiatives and increased demand for supply chain solutions. The company has successfully passed along cost increases to its customers, protecting margins amid inflationary pressures. Additionally, high asset utilisation rates and disciplined cost management have helped cement Brambles’ profitability.

Sustainability and Efficiency Initiatives

The company has an ambitious agenda to balance industry growth with sustainable practices, positioning itself as a circular economy pioneer. Brambles continues to pursue net-zero emissions by 2040 and increase the use of recycled materials in its pallets and containers. These efforts have engaged environmentally conscious investors and companies seeking to decarbonise their supply chains.

Stabilisation of Supply Chains Post-COVID-19

Brambles’ operations have normalised, with COVID-19 causing less disruption to its supply chain. As global trade returns to normal, businesses are increasing their activity in managing supply chains, which has driven demand for its pallet and container solutions. This has further improved asset circulation and operational efficiencies.

Strong Dividend and Shareholder Returns

Brambles remains committed to returning value to shareholders through dividends and share buybacks, reaffirming investor confidence. Its strong cash flows and the defensiveness of its model make it an appealing stock in uncertain market conditions. Its ability to produce stable earnings has sustained a strong dividend yield that appeals to income investors.

 

Could Another Tariff Shock Threaten Brambles’ Growth?

While the recent rally brings optimism, risks remain. One of Brambles’ biggest concerns regarding its continued success is trade protectionism and tariffs. An increase in tariffs, especially in the US and Europe, could undermine Brambles’ cost structure and severely impair profitability. Here’s how:

An Increase in Supply Chain Costs

Tariffs on wood and steel, primary materials for pallet production, could raise manufacturing costs. Although Brambles may try to pass these expenses along to customers, rising prices may negatively affect demand. Brambles will need to strike a fine balance between cost recovery and maintaining its customer base.

Disruption of International Trade

Tariffs that disrupt global trade could reduce demand for Brambles’ services, particularly in regions where protectionist policies may restrict intra-border shipping. A slowdown in international trade activity could reduce pallet and container circulation, ultimately impacting revenues.

Currency Volatility

Trade wars often result in fluctuations in local currencies, which may affect Brambles’ earnings due to its international operations. A weakened US dollar, for example, could impact revenues from North America, one of Brambles’ key markets. Currency fluctuations may also influence the price of raw materials, logistics costs, and other factors.

Policy Uncertainty in Key Markets

Policy uncertainty is another concern, particularly with the upcoming US presidential elections and shifting trade relations between China, Europe, and the US. Any new tariffs or trade protections would require Brambles to realign its supply chain model, possibly raising operating costs. The company’s ability to adjust its sourcing and distribution strategies would be crucial in mitigating such risks.

 

The Bullish Case: Why Brambles Might Overcome Tariff Pressures

Despite the potential risks, there are several factors that could make Brambles resilient to another tariff shock:

Strong Pricing Power

Brambles has demonstrated the ability to pass cost increases to customers. This pricing power helps shield its margins from inflationary and tariff-related cost pressures. The company’s global presence also allows it to adjust its pricing strategies based on geographical differences and prevailing economic conditions.

Expanding Automation and Efficiency

The company has invested in automation and digital tracking solutions to optimise pallet usage and reduce waste. These initiatives improve cost efficiency, helping to offset potential tariff-driven cost increases. Connected technologies enhance tracking and provide better visibility into the supply chain, enabling customers to optimise inventory management.

Sustainability and Regulatory Tailwinds

As governments push for greener supply chains, Brambles’ reusable pallet model is well-positioned to benefit. Regulatory incentives may even help offset the risks from trade policies. Additionally, the increasing demand for ESG investments should provide Brambles with a boost from institutional investors.

Geographical Diversification

Brambles’ extensive geographical footprint allows it to shift operations and sourcing strategies away from tariff-heavy areas, reducing exposure to trade conflicts. The company’s ability to operate across different markets offers greater flexibility in risk management and capitalises on growth opportunities.

 

Future Outlook: What’s Next for Brambles?

Going forward, Brambles’ resilience will depend on macroeconomic conditions, trade policies, and the execution of its cost control strategies. Investors should closely monitor US-European trade negotiations, as these will significantly impact the company’s cost structure.

If trade tensions remain manageable, Brambles should continue to see positive growth. However, if tariffs increase in scope or become more stringent, the company may need to recalibrate its pricing strategies or focus on additional cost efficiencies to maintain profitability.

 

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FAQs

• What caused Brambles’ recent share price recovery?

  Brambles has performed well due to pricing adjustments, sustainability initiatives, and the stabilisation of its supply chain. Additionally, the company’s dividends and share buybacks have boosted investor confidence.

• How do tariffs affect Brambles’ business?

  Tariffs can increase material costs, disrupt international trade, and cause currency fluctuations, all of which can affect the company’s profitability. However, Brambles has implemented proactive strategies to mitigate these risks.

• Is Brambles a good investment for long-term growth?

  With its defensive model, strong pricing power, and focus on sustainability, Brambles presents an attractive long-term investment. However, investors should remain aware of risks such as trade policies and inflation.

• How is Brambles addressing inflation and rising costs?

  Brambles has successfully passed cost increases onto customers and is working on improving automation and operational efficiency to manage rising costs.

• What impact would a US-China trade war have on Brambles?

  A US-China trade war could disrupt global supply chains, affecting Brambles’ operations. However, the company’s geographical diversification allows it to adjust to changing trade dynamics.