A Financial Analysis of RR Donnelley & Sons Co.

The Printing and Publishing Industry has many familiar names to consumers. Dow Jones, News Corporation, and the Tribune Company are all well-respected companies in this respected field. However, relative to market-cap size for American companies, companies like McGraw-Hill, Gannett, and Washington Post lead the industry. One other large-cap corporation, a $9.35 billion dollar stock, not only has many a reputable name in this field, but a solid business plan with strong fundamentals. These enticing features make this company, RR Donnelley (RRD), a strong candidate to have in any portfolio.

Before going into some of the financial information, it is important to understand what this company does. According to Reuters, RR Donnelley, “is a full-service provider of print and related services, including business process outsourcing.” Operating under two business practices, Global Print Solutions and Global Services, RR Donnelley has a large area of interest, as these two segments “provides solutions in commercial printing, direct mail, financial printing, print fulfillment, labels, forms, logistics, call centers, transactional print-and-mail, print management, online services, digital photography, color services, and content and database management to customers in the publishing, healthcare, advertising, retail, technology, and financial services,” among others. More specifically, the Global Print Solutions segment, which takes up 62% of RR Donnelley’s business, deals with products such as magazines, phone books, and directories. The other 38% comes from general Global Services which helps produce digital photography and financial print. Also, while headquartered in Chicago, Illinois, the company not only offers services in the United States, but extends its business and outsourcing aid to, “North America, Europe, India, the Philippines and Sri Lanka.” With such an array of regions to provide service too, RR Donnelley really covers all areas and as a result, performs well financially. Some may question the longevity of a company dealing directly with paper as more information becomes digitalized, but looking at the share price value over the past five years, the company has at very worst been flat during a normal calendar year, and should continue to do even better if it follows up with more capital spending and innovated procedures for the future.

While understanding the business strategy of a company is a vital starting point for any stock analysis, research regarding a company’s financial background and future is also quite important. In the case of RR Donnelley, there is strong evidence to support the claim that this company is doing quite well in this area. Last fiscal year the company reported revenue of $9.84 billion according to Capital IQ. This number is quite high, even compared to higher large-cap companies like McGraw-Hill which only brought in $6.41 billion in sales over the same time period. As a result, sales and EPS figures were much higher on a year to year basis, not only in positive territory, but well above industry averages. And looking at the five year sales growth rate, according to Reuters, at 11.95 and the five year EPS growth rate at 54.21 compared to the respective industry figures of 5.85 and 22.69, there is strong evidence to predict continued excellence in the future for this company.

Nevertheless, some investors may question the margins of the company. According to Reuters, last fiscal year, RR Donnelley reported gross margins of 26.91%, operating margins of 8.10%, and net profit margins of 4.38%. Comparing these numbers to the respective industry figures of 46.47%, 17.20%, and 11.10%, RR Donnelley’s figures are not that relatively great. However, what changes this opinion is that each of these figures is above the five year respective averages of 26.87%, 6.60%, and 3.27%. Looking at a competitor like Gannett, its past fiscal year operating margins at 24.66% and net profit margins at 14.16% are below its five year average. Another competitor, Washington Post, has the same declination to report regarding the aforementioned two figures. Therefore, while RR Donnelley does has slightly lower margins with respect to the industry, the more important increase-from-average figures assures that this company is still growing.

When using numbers in reference to share price, there is a strong argument made that RR Donnelley is not only growing, but undervalued as an equity as well. According to Capital IQ, RR Donnelley has a forward P/E ratio of 13.93. Comparing this number to the industry average of 21.43, and competitor figures (McGraw-Hill: 19.78 and Washington Post: 21.63), there is strong evidence to support the undervalued claim. In addition, according to Reuters, RR Donnelley is expected to have a 0.80 price to sales ratio in fiscal year 2007 and an enterprise value to revenue number of 1.13. Comparing these numbers, respectively, to rival figures (McGraw-Hill: 3.63 and 3.47, Washington Post: 1.78 and 1.80, and Gannett: 1.65 and 2.27), and there should be no question that there is a large potential for this stock to significantly rise. The last ratio to look at, PEG, shows that RR Donnelley stands at 1.63. While not great generally, relative to the aforementioned competitors, this company has a figure lower than most of them.

Now while there is support that RR Donnelley is both growing and undervalued, many investors may question management efficiency. According to Reuters, RR Donnelley has an ROE of 10.61%. While the number is not significantly below the industry average at 14.53%, it is slightly below some of the mentioned competitors. Nevertheless, what stands out for RR Donnelley is its growth. Looking at the five year average of ROE for this company at 8.98%, every year RR Donnelley and its CEO Thomas J. Quinlan try to improve the company using investor’s capital. The same principle applies the company’s ROA of 4.03% and ROI of 4.96%. However, the same philosophy cannot be said with the given figures of Washington Post and Gannett: both of which has seen drops in these numbers last fiscal year from its five year average. In addition, RR Donnelley remains solvent with an above-industry average current ratio of 2.11 in its most recent quarter. Cash flow, both operating and leveraged both are positive like most other companies in this industry, but RR Donnelley has the added benefit of a low price to free cash flow value to entice more investors. Overall, most of the figures for this company look solid, and barring any major aberration, should seem to continue this way.

With such strong fundamentals and an intriguing business plan, there is not question that RR Donnelley is a great purchase for any investors. Even if some numbers do not work out properly for this corporation in the future, RR Donnelley has a strong dividend yield of 2.45% which is nearly double the industry average. Capital Spending is great at a 6.49% five-year growth rate, which is much higher than the industry and could indicate a variety of use for its free cash flow in the future. Therefore, with the provided information, there should be no reason for any investor to pass up considering the option of having shares of this stock.