RRD.WI Donnelley (R.R.) & Sons Co.

Printing major R.R. Donnelley & Sons Company (RRD) recently announced that it has won a multi-million dollar contract from IMG, a global sports, fashion and media company with operations spanning across more than 30 countries.

IMG provides a number of different services including event management, media production and distribution, league development, sponsorships, licensing and consulting. The multi-year contract with Donnelley includes content production and distribution in the form of magazines, direct responses and event marketing materials. IMG expects to utilize Donnelley’s expertise and global platform to improve its services going forward.

Donnelley’s growth in recent years has been primarily driven by important contract wins. In November this year, Highlights for Children Inc. awarded a multi-year contract to Donnelley. In October, the company received a $550.0 million multi-year contract from American Media Inc. (AMI). Donnelley has also won a number of multi-year contracts from Herbalife, Meredith ($300.0 million), Bauer Publishing Group, L.L. Bean and Shop Direct Group in 2011. Donnelley also entered into accretive partnerships with KBA and HarperCollins in 2011.

We believe that the new contracts and partnerships bode well for Donnelley, as they help the company to tackle the growing threat of digital technologies that enable much easier transfer, designing, resetting and reproduction of data. Moreover, the new contract wins are a reflection of Donnelley’s superior technology and growing reputation, which enhances its competitive position, in our view.

Other than the multi-year contracts and partnerships, the company’s growth is also attributed to significant acquisitions in the recent past. Year to date, Donnelley has acquired StratusGroup, Genesis Packaging & Design Inc, LibreDigital, Sequence Personal, Helium, Inc., Journalism Online, LLC and 8touches.

The acquisitions have not only expanded and enhanced Donnelley’s offerings to its current customers, but also helped it to woo new customers. The acquisition of Bowne & Co in 2010 remains the most accretive acquisition in the company’s history to date. The Bowne acquisition proved accretive to Donnelley in the very first year. Bowne contributed 0.6% ($61.2 million) to the company’s total revenue growth of $161.5 million in fiscal 2010.

In the recently ended third quarter of 2011, U.S. print and related services revenue increased 6.3% year over year driven by higher contribution from Bowne and volume increases in commercial print and logistics. International sales also increased 12.3% year over year, driven by strong sales performance from Bowne. We believe Donnelley’s continued focus on acquisitions will spur its already dominant market position and drive long-term growth.

Recommendation

We remain Neutral on a long term basis (3-6 months). Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins. We believe that strong alliances and customer wins including those of AT&T Inc. (T) and Verizon Communications Inc. (VZ) will create value for the company over the long term.

However, we prefer to remain on the sidelines based on the weak macro economic conditions prevailing in most of Donnelley’s current and prospective markets. Moreover, higher pension expenses, continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward.

Currently, R.R. Donnelley has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).

 
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