QUAD - Quad Graphics

[Viking]

Quad Graphics is the second largest commercial printer in the US (RRD is #1 and more than 2 x as large). Stock looks cheap. As the integration of the larger Worldcolor Press (Quebecor) is completed over the next 6 months the company should be better able to focus on growing the business and margins.

 

Quad = $12.60

Dividend = $1.00 = 7.9% (just increased by 25%)

Shares Oustanding = 47 million

2011 EBITDA = $638 (adjusted; not including restructuring costs for Worldcolor)

2012 Est Free Cash Flow = $300 million

Debt = $1,471 million (paid back $325 in past 18 months)

Market Cap = $590 million

 

Quad presentation: http://media.corporate-ir.net/media_files/IROL/23/231687/2012_03_01_Baird_Conference_Presentation_final.pdf

 

What I like:

1.) experienced and savvy management team

2.) substantial free cash flow generation (est min $300 million in 2012)

3.) focus is on making money (not market share); gross margins lead the industry

4.) long term track record of being innovators; collaborative approach with employees

5.) using cash flow to pay back debt ($325 million in last 18 months) and delever the balance sheet

6.) modern manufacturing platform; they have been investing in their facilities over the years (not milking them for cash)

7.) the 24 month Worldcolor integration is almost done; focus can shift to growing profitable business

8.) long term focus with decisions; likely due to fact it is family controlled

9.) CEO recently purchased $1 million in stock

 

Watchouts:

1.) commercial printing industry is shrinking; lots of excess capacity; margins are shrinking (yes, this is a big reason the stock is so cheap)

2.) limited public disclosure pre 2010 – only started trading on NYSE after Worldcolor acquisition in 2010

3.) family controlled (via share structure); family owns 33% of shares

4.) shares not very liquid; due to goofy share and ownership structure

 

I may be misguided but Domtar keeps rattling around in the back of my head as an example of a company that can do well in a declining industry. The key seems to be a focus on margins (not market share), innovation and delevering the balance sheet. We will find out over the next few years if Quad is up to the task.

 

Other links:

Gurufocus article: http://www.gurufocus.com/news/171917/a-great-company-at-a-wonderful-price-in-a-terrible-industry--quad

Worldcolor purchase article: http://whattheythink.com/articles/42689-look-quadgraphics-world-color-press-arrangement/

 

PS: Transcontinental is the dominant Canadian printer; also very cheap. I don't think TCL-A.TO is as well run as QUAD; however, Canada likely not as competitive as the US.