We are downgrading R.R. Donnelley & Sons Company (RRD) to Neutral from our previous Outperform rating and lowering our price target to $23.00. Our target is based on a P/E multiple of 15.2X our 2010 EPS estimate.
R.R. Donnelley’s fourth quarter results beat the Zacks Consensus Estimate, but were much below the year-ago level. The challenging economic environment led to weakness across all end-markets, with business slowing down at several key customers. As a result, the company was forced to lower prices, which impacted both its top and bottom lines. Revenue fell 14.9%, while earnings per share fell 45.6% year over year in 2009.
However, the company now expects demand to stabilize and even strengthen in future quarters. As a result, the company expects revenue growth in fiscal 2010.
Moreover, we expect its cost containment efforts will improve margins and leverage growth in earnings. The company’s aggressive acquisition policy, debt repayment initiative, impressive cash flow and stable dividend payout are other positives.
In our opinion, RRD has sound fundamentals and a number of competitive advantages against its rivals Dai Nippon Printing, Toppan Printing and World Color Press, which have enabled it to generate impressive cash flows.
Most recently, the company announced its plans to acquire Bowne & Co., Inc., a provider of digital one-to-one printing services for healthcare, transactional communications, financial services, marketing communications and other applications.
The acquisition is expected to close in the second half of fiscal 2010 and is expected to be accretive to R.R. Donnelley’s earnings in the first full year after the closing of the transaction. The company’s focus on acquisitions will expand and enhance its offering to its current customers, while also creating an opportunity to provide its products to new clients. We believe this acquisition will have a positive impact on its 2011 results.
To increase shareholders’ value, the company pays out an attractive regular dividend (5% yield) supported by its strong free cash flow. Thus, we remain positive on RRD’s long-term value for investors.
Although the company expects demand to stabilize and consumer spending to improve this year we expect slow recovery in its results in 2010 due to the lingering effects of the economic crisis.
Read the full analyst report on “RRD”
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