R.R. Donnelley & Sons (RRD), a leader in the commercial printing industry is scheduled to report fourth quarter 2010 results on February 22, before the market opens.
Third Quarter Highlights
Donnelley reported third quarter 2010 non-GAAP earnings of 44 cents per share, beating the Zacks Consensus Estimate of 42 cents. Earnings decreased 19.0% year over year from 54 cents.
Revenues increased 1.0% year over year to $2.48 billion, but fell short of the Zacks Consensus Estimate of $2.53 billion. Third quarter revenue growth was dampened by an unfavorable foreign exchange and lower paper sales. This was offset by better volumes in the U.S. Print and Related Services segment. However, the company continued to win new customer contracts in the quarter.
Guidance and Estimates
During the third quarter earnings release, management said that it expects strong revenue growth in fourth quarter 2010 and fiscal 2011. Revenue is expected to grow 0.5% to 1.0% year over year for 2010. Revenues are expected to be affected by foreign exchange rates and lower paper sales.
For 2010, non-GAAP operating margin is expected in the range of 7.3% to 7.5%. Depreciation and amortization is projected at approximately $535 million versus the previous expectation of $540 million. Interest expense will likely be around $225 million. The effective tax rate (non-GAAP) is expected the 30% to 32% range. The forecast for capital expenditure is approximately $225.0 million, implying free cash flow of $600 million.
Management did not provide any earnings guidance. The Zacks Consensus Estimate for earnings is currently pegged at 47 cents per share for the fourth quarter and $1.71 for full-year 2010.The current Consensus estimate for fourth quarter 2010 is a penny above the year-ago quarter, when Donnelley reported earnings of 46 cents.
There has been no upward or downward revision in estimatesover the last 30 days for the fourth quarter or full-year 2010 as well as for 2011. We do not see any surprises this quarter, with earnings expected to be in line with the current Zacks Consensus Estimate.
But Donnelly’s quarterly results have not always been devoid of surprises.Donnelley has reported positive surprises in all of the last four quarters with an average of 13.1%. This means that it beat the Zacks Consensus Estimate by that percent.
Recommendation
Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins; however, foreign exchange movement and lower paper sales are expected to create significant headwinds to fiscal 2010 revenues.
The company’s cost-containment efforts, operating leverage, aggressive acquisition policy, debt repayment initiative, impressive cash flow and stable dividend payout will leverage growth. Moreover,a cyclical recovery in advertising, growth in logistics and digital business, broadening customer base and new product launches are long-term drivers of growth.
We believe strong alliances and customer wins such as AT&T (T) and Verizon Wireless (VZ) will create value for the company over the long term. We also remain positive on the Bowne acquisition; but pricing pressure and a highly leveraged balance sheet could limit near-term stock appreciation.
We maintain our Neutral rating on the stock over the long term. Moreover, the lack of estimate revisions, in either direction, in the company’s Zacks Consensus implies an almost flat performance for the current year. The stock is currently a Zacks #3 Rank (short-term Neutral rating).
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