Donnelley Wins another Contract - Analyst Blog

R. R. Donnelley & Sons Company (RRD) recently won a multi-year multi-million dollar contract from Chrysler Group LLC. By virtue of the contract, Donnelley will be providing its Print Management services to the automobile manufacturing company.

Donnelley, under the contract terms, is to provide Chrysler with a central point of printing and distribution of labels and forms, direct mail, logistics and commercial printing. The print management services are expected to be cost effective for Chrysler. Additionally, Donnelley will provide variable digital printing and individualized communications as a part of its CustomPoint (R) intelligent print management system.

In recent years, Donnelley’s growth has been driven by important contract wins. Donnelley has won a number of multi-year contracts from 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. The Chrysler contract is the first for the company in the year 2012.

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. The acquisition of Bowne & Co. in 2010 remains the most accretive in the company’s history to date. The Bowne acquisition proved accretive to Donnelley in the very first year after the takeover. 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, the U.S. print and related services revenue increased 6.3% year over year, driven by improved contribution from Bowne. Volume increases in commercial print and logistics also contributed to higher revenues. International sales also increased 12.3% year over year, driven by strong sales performance from Bowne. We believe that Donnelley’s continued focus on acquisitions will strengthen its already dominant market position and drive long-term growth.

Recommendation

Donnelley is seeing 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.

We remain Neutral on a long term basis (3-6 months). 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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