A leading provider of integrated communications and printing solutions, R.R. Donnelley & Sons Co. (RRD) recently signed a global supply chain agreement with renowned publishers HarperCollins, a subsidiary of News Corporation (NWS).
The two companies have had a healthy relationship for the last 20 years and the recent agreement enhances this relationship.
Under the terms of the agreement, R.R. Donnelley will solely handle printing, logistics and shipping of all new HarperCollins releases from November 2011.
Moreover, R.R. Donnelley will handle operations for all frontlist and backlist titles of Zondervan, a division of HarperCollins Publishers.
RR Donnelley will also offer global Print on Demand (POD) services to HarperCollins, thus enabling the company to print titles anywhere it holds publishing rights.
HarperCollins and Zondervan will continue to handle credit, collection and customer services internally for their businesses, while reorders will continue to be shipped from their Scranton Distribution Center.
The agreement is expected to speed up the distribution process at a reduced freight cost, while increasing efficiency at the same time. We believe R.R. Donnelley’s new role as a logistics provider will help the company to seize the potential in the supply chain market going forward.
First Quarter Recap
R.R. Donnelley reported earnings per share (EPS) of 33 cents in the first quarter of 2011, missing the Zacks Consensus Estimate by 3 cents. Revenues increased 7.0% year over year to $2.58 billion but missed the Zacks Consensus Estimate of $2.63 billion
The year-over-year growth was driven by increased sales related to the acquisition of Bowne and favorable foreign exchange impact of $15.4 million.
R.R. Donnelley continues to expect revenue growth in the low single digit range compared with revenue of $10.7 billion reported in fiscal 2010. Non-GAAP operating margin is expected to be in the range of 7.6% to 7.8%, a 30- to 50-basis-point improvement over 2010 and inclusive of an increase in non-cash pension expense of approximately $23 million.
R.R. Donnelley’s Board of Directors has authorized a share repurchase program of up to $1 billion of the company's common stock to be completed by December 31, 2012.
However, management did not provide any earnings guidance. The Zacks Consensus Estimate for earnings per share is currently pegged at 51 cents for the second quarter of 2011.
Recommendation
Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins. We believe aggressive share repurchases, recent acquisition of Journalism Online, continuing strong contribution from Bowne and substantial cash flow generation ability will drive the stock going forward.
However, higher pension expenses, continuing pricing pressure and a highly leveraged balance sheet are expected to be significant headwinds going forward.
We maintain our Neutral rating on a long-term basis (6-12 months). Currently, R.R. Donnelley has a Zacks #2 Rank, which implies a Buy rating on a short-term basis (1-3 months).
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