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

Printing major R.R. Donnelley & Sons Company (RRD) has secured a multi-year multi-million dollar contract from Guideposts for providing comprehensive printing solutions and logistics support to the latter. Guideposts is a non-profit organization in the business of publishing books and magazines, including the narration of inspirational tales from real life.  

Guideposts magazine has a massive paid circulation of 2 million, selling more than 5.7 million books every year. Apart from providing printing solutions for books and magazines, Donnelley will be entrusted with printing management services for forms, labels and other Guideposts productions.

Donnelley’s recent growth has been driven by important contract wins. The latest contract from Guideposts adds to the decent list of major multi-year contracts won this very year from companies such as Metro Inc., Chrysler and Office Depot Inc. (ODP). Other contract wins include Herbalife, Meredith, 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 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.

However, we notice that in the recently concluded quarter, U.S. print and related services revenue for Donnelley was down 4.0% from the comparable prior-year quarter to $1.85 billion. Lower volumes along with continued pricing pressure across the segment and lower pass-through paper sales affected this segment’s revenue.

Nonetheless, Donnelley has been experiencing strong growth in the logistics segment. In the last concluded quarter, this segment reported an 11.3% jump in revenue. Strong growth in the logistics space along with volume increase in certain office products restricted the decline in total revenues to 3.6% on a year-over-year basis.

We believe that Donnelley’s stock will most likely remain under pressure in the near term due to weak macroeconomic conditions prevailing in most of its current as well as prospective markets. The continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward.

In such a scenario, Donnelley is expanding its scope beyond traditional markets primarily through acquisitions. The company’s continued focus on acquisitions will also spur its already dominant market position and drive long-term growth, in our view.

We have a Neutral recommendation over the long term (6-12 months). Currently, Donnelley has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

 
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