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

Printing major R. R. Donnelley & Sons Co. (RRD) recently announced that it has secured another multi-year multi-million dollar contract from Office Depot Inc. (ODP). However, the details of the transaction were not disclosed. As per the contract, Donnelley will mainly provide catalog and direct mail services to Office Depot.

In recent times, important contract wins have brought significant growth to Donnelley. The company has won a number of multi-year contracts from IMG, Highlights for Children Inc., American Media Inc., Herbalife, Meredith, Bauer Publishing Group, L.L. Bean and Shop Direct Group in 2011. Donnelley also entered into accretive partnerships with KBA and HarperCollins last year.

Donnelley has stretched its deal winning streak into 2012 and recently won a multi-year multi-million dollar contract from Quebec and Ontario-based Metro City. The company has also won a multi-year multi-million dollar contract from the Chrysler Group LLC in January this year. Under the terms of the contract, Donnelley will be providing its Print Management services to the automobile manufacturing company.

We believe that the new contracts and partnerships bode well for Donnelley, as they help the company 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. 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 gain new customers. We believe that Donnelley’s continued focus on acquisitions will strengthen its already dominant market position and drive long-term growth.

Recommendation

Donnelley is set to release its fourth quarter 2011 results on February 22, 2012 before market closes. Donnelley’s third quarter results were in line with the Zacks Consensus Estimates. We expect Donnelley to earn 44 cents per share in the fourth quarter.

We remain Neutral on the company over the long term (6-12 months) despite its increasing volumes and new customer wins. This is because Donnelley shares are down 15.0% on a year-to-date basis compared to a 5.8% increase in the S&P 500. We expect Donnelley to continue to underperform S&P 500 due to weak macroeconomic conditions prevailing in most of its current as well as 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, Donnelley has a Zacks #4 Rank, which implies a Sell rating over the short term (1-3 months).

 
OFFICE DEPOT (ODP): Free Stock Analysis Report
 
DONNELLEY (RR) (RRD): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research