Donnelley Buys StratusGroup

R.R. Donnelley & Sons Co. (RRD - Analyst Report) recently announced that it has acquired West Chester; Ohio-based StratusGroup, which specializes in customized pressure-sensitive labels and packaging for health & beauty, food, beverage and other segments.

StratusGroup primarily offers UV flexography, UV offset, UV rotary, digital and conventional offset for a range of custom products, including folding carton, insert and multi-pack. The company also offers labeling solutions for bottles. StratusGroup boasts a large clientele including alcoholic beverage company Seagram.

Donnelley believes that the addition of StratusGroup’s technology to its family of solutions will expand its consumer packaging customer base. We consider this a wise move, given the fact that the traditional commercial printing segment is on a secular decline.

The biggest threat that the company currently faces is from digital technologies that enable much easier transfer, designing, resetting and reproduction of data. This affects the big projects, such as books and journals, where printed pages are much higher.

Additionally, with publishers increasingly coming out with digital versions of books and sophisticated e-book readers from Amazon.com Inc. (AMZN - Analyst Report) and Barnes & Noble Inc. (BKS - Snapshot Report) for reading these books becoming increasingly available, the interest in commercially printed paperbacks and hard covers is waning. Donnelley needs to expand its scope beyond this traditional business and the StratusGroup acquisition is likely to take it in that direction.

Donnelley does have some experience with acquisitions. Over the last few years, the company has relied heavily on them for growth. In September 2011, Donnelley acquired Lemont, Illinois-based privately held Genesis Packaging & Design Inc. In August this year, Donnelley acquired LibreDigital, a digital content distribution provider, for an undisclosed amount. It also acquired New York-based privately held software company Sequence Personal, for an undisclosed amount.

From March 2008 to June 2011, the company acquired 6 companies, including 3 in 2010 and 2 in 2009. In the first half of 2011, Donnelley acquired 2 companies: Helium, Inc. and Journalism Online, LLC.

Recommendation

We remain Neutral on a long term basis (3-6 months). The company reported third quarter earnings in line with our expectations but revenues missed the Zacks Consensus of $2.69 billion by a whisker.

We believe that strong alliances and customer wins including those of AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report) will be accretive for Donnelley over the long term.

However, we prefer to remain on the sidelines due to 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.

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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