A premier printing company R. R. Donnelley & Sons Company (RRD) announced that it has been selected by the Leading Hotels of the World Ltd. to produce their 2011 Directory. Financial details on the deal were not divulged.
 
R.R. Donnelley is the largest printing company in the U.S. and worldwide, providing various global printing services to a wide variety of businesses across the globe. The company also plays an active role in offering an array of related services such as logistics and distribution for print customers and mailers.
 
Using its global printing platform, R.R. Donnelley will print the directories in Latin America to support the Leading Hotels’ worldwide 450 member hotels. Management points out that the Leading Hotels of the World Ltd. are a part of the hospitality industries representing the hotels, resorts and spas.
 
We believe R.R. Donnelley will benefit from the rebound in the Directories business as it remains a key growth driver for the company. R.R. Donnelley is strategically positioned to benefit from its portfolio of diverse offerings in various vertical segments such as medical services, consumer package goods, retail, healthcare, financial services, publishing, entertainment and investment services.
 
Approximately 154 customers purchased 7 or more products and services in 2009, compared with 133 customers in 2008. These customer wins will augment the company’s revenue growth.
 
Moreover, R.R. Donnelley plans to leverage its existing customer base to generate substantial organic growth in 2010. We believe new product launches and broadening customer base will ensure significant opportunities for growth, going forward.
 
We expect revenues to rebound in 2011 as the company is investing in new facilities and new businesses in Latin America, North America, Europe and Asia. Further, increased marketing expenses will help R.R. Donnelley to expand its directories and magazine businesses.
 
Second Quarter Earnings
 
R.R. Donnelley is set to release its financial results for the second quarter ended June 30, 2010, on August 4, before the market opens.
 
During the first quarter conference call, R.R. Donnelley reaffirmed its revenue and cash flow guidance. The company expects demand to stabilize and, hence, anticipates that revenues will grow in fiscal 2010 in the low single-digit range, excluding acquisitions.
 
For 2010, non-GAAP operating margin is expected to be in the range of 7.0% to 7.2% versus previous expectation of 6.5% to 7.0%. However, this is a decrease from the 2009 level, primarily due to non-cash increases in pension and post-retirement benefit expense of $44 million and the non-cash increase in the LIFO inventory provision of approximately $30 million.
 
Depreciation and amortization is expected to be approximately $555 million versus previous expectation of $550 million. Interest expense is expected to be approximately $210 million versus previous expectation of $220 million. Effective tax rate (non-GAAP) is expected to be in the range of 30% to 32%.
 
The company expects to generate operating cash flow of approximately $800 million to $850 million. Capital expenditure is expected to be approximately $200 million, resulting in free cash flow of $600 to $650 million range.
 
Management did not provide any guidance for earnings. The Zacks Consensus Estimate is currently pegged at 36 cents per share for the second quarter and $1.57 for the full year 2010.
 
Maintain Neutral
 
R.R. Donnelley currently has a Zacks #4 Rank (Sell) but a longer-term recommendation of Neutral.
 
Although estimates for the second quarter have remained unchanged in the last 30 days, the analysts have made a downward revision to the earnings estimates for the full year 2010 to $1.57 from the previous expectation of $1.59, down 2 cents. One of the 4 analysts covering the stock made a downward revision to the estimates for 2010 in the last 30 days. There was no upward revision in the analysts’ estimates.
 
Although the company expects demand to stabilize and consumer spending to improve this year, we expect a slow recovery in its results in 2010 due to the lingering effects of the economic crisis.
 
We believe R.R. Donnelley’s long-term positives are already priced into its shares and, therefore, our long-term Neutral rating remains unchanged at this stage but we lower our price target to $18.00 from our previous $23.00 based on reduced profitability expectation for 2010.
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