In late October, investors in The Brink’s Company (BCO) received a spinoff of the company’s home security division.  The new stock listed as Brink’s Home Security Holdings, Inc. (CFL) has performed very well over the last 8 months, rallying as much as 50% above the closing price on its first day of trading.  The transaction was designed to unlock the value of the home based business which may have been overlooked due to the larger secured transportation and cash logistics side of the parent company.

It is a bit baffling how well this strategy worked.  Investors in BCO received one share of the new CFL for every share of the parent company they owned.  And now 8 months later both stocks are well above their levels from when the spinoff occurred.  Now both companies are certainly strong firms with positive cash flow and a well respected brand name.  But economic weakness which has pressured growth rates does not appear to be showing up in the stock price.

For Brink’s Home, this is especially confusing since the company relies heavily on consumers and to a lesser degree on new construction for its future revenue growth.  During the first quarter revenue came in just a bit higher than last year at $136 million.  Adjusted Earnings were $0.40 per share, a sharp 43% increase over the first quarter 2008.  A good bit of this increase in profitability was due to the fact that the division did not have to pay hardly any royalty to the parent company.  This type of earnings growth is nice, but not necessarily repeatable since next year there will be little comparable difference in the royalty payment.

Management noted that growth is being pressured by a weak economy in general, and specifically the portion of the business that protects new construction is slow.  It’s hard to imagine this business line getting much better in the near future with the likelihood of rising interest rates, a deeply entrenched consumer, and employment continuing to be weak.  Logically, it seems that home security could be an opportunity for some consumers to cut back on expenses and lower expenses.  This may be to blame for the fact that net new subscribers were lower than the growth seen in previous quarters.

CFL looks especially vulnerable after a failed breakout attempt last week.  The $30 level has proven to be resistance twice now, and a weakening market picture could take the wind out of optimistic investor’s sails.  The stock is currently trading at 22 times expectations for this year, and earnings are actually expected to decline in 2010.  It’s very hard to justify a growth multiple on this company if growth turns out to be non-existent.

Brink’s Home currently has no debt and adequate cash on hand to fund its capital expenditures.  The company will spend a good bit of marketing costs in the third quarter as it launches a new brand image.  It will be very interesting to see if a new campaign can jump-start growth even during a difficult economic environment.  If the stock market begins to decline again and home values do not pick up, it is unlikely that consumers will be easily convinced to spend more on security systems.

It wouldn’t surprise me to see analysts set a stock target for this stable company at $14.75 or so.  That would represent a multiple of 12 on future earnings of $1.23.  While it sounds a bit pessimistic to expect a 50% drop in the stock, I don’t see why investors would currently pay 22 times earnings for this company.  My recommendation would be to consider opportunities to short this highly priced stock while keeping a tight stop just a bit above $30.

FD: Author does not have a position in CFL