RR Donnelley & Sons Co (RRD) by D Klein 8/6/2010

My initial research on RRD indicates the company may be undervalued.

First a description from their website:
RR Donnelley is a global provider of integrated communications. Founded more than 145 years ago, the company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to leading clients in virtually every private and public sector.

Diluted earnings from 2007-2009 were negative but it appears the company has turned the corner and have returned to pre 2007 profitability, however it’s important to note that free cash flow has been trending up since 2004 and operating income has been positive if merger and restructuring charges are backed out.  In the second quarter released this week, the company earned $88.8 million, or 42 cents per share, compared with $25.2 million, or 12 cents per share, a year ago.  Excluding the charges, R.R. Donnelley would have earned 47 cents per share in the latest quarter. Guidance for the year is 1% top line growth, i.e., it is starting to trend back up.

The dividend yield is very attractive at 6%.  The dividend appears stable given the strong FCF generated by the company and a return to profitability.  The payout, based on FCF is about 34%.

I calculate a fair value of $22 based in part on forward earnings of $1.54 and FCF growth of 7.6%, a 20%+ discount to where it is trading at the time of this writing.
Click here for a more complete list of data used.
Conference Call Transcript


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One Response to RR Donnelley & Sons Co (RRD) by D Klein 8/6/2010

  1. David says:

    After some additional research and after recieving additional data from other investors I’ve modified the model for RRD. The stock still trades at a discount but I’ve lowered FV to $19. A revised list of data/calculations are available at the link provided in the original writeup.

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