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R.R. Donnelley scores again, but can it win the game?

by Deb Weinstein
March 12, 2009


For Chicago-based printing behemoth R.R. Donnelley & Sons Co., another multi-year, multi-million-dollar contract is, according to Benchmark Company LLC analyst Edward Atorino, a non-event. “It’d be news if they didn’t get the contract,” he said.

"They are head, shoulder, waist and knees above everybody in the business in terms of size, quality, footprint," Atorino declared.

In agreement, Ty Govatos of CL King & Associates rates the stock a “strong buy” and expects Donnelley's current cost-cutting measures to “have a noticeable impact” in the current quarter, according to 
a research note dated Feb. 25.

However, behind the seeming omnipotent normality of the new $175 million contract with Orchard Brands Corp. of Beverly, Mass., there lurks a deeper matter:  the fate of the printing business and how even mighty R.R. Donnelley, known worldwide as a printer of catalogs and mass-circulation magazines, will adapt to the increasing digital threat.

Other analysts, and yes, Donnelley too, express great uncertainty about the future.

Craig Huber of Barclays Capital described the stock as “not attractive” in a research note dated Feb. 26. Huber said the sector as a whole is suffering due to “overcapacity.”

An analyst who asked not to be identified said the outlook for print, even with R.R. Donnelley’s fine management team, is poor. “Printing seems to be kind of a dinosaur business that I don’t think is going to rebound as much when the economy turns,” he said.

 “It’s not that different from newspapers, really," he went on. "It’s an industry that’s under pressure from a lot of different [technologies]. I just see them losing market share to other digital forms of media over the long run."

In part because of acquisition-related expenses, R.R. Donnelley has posted big losses for the past two years. It lost $190 million, or 90 cents per diluted share, in 2008, and $48 million, or 22 cents per diluted share, in 2007.  The company, according to its annual report, is in the process of integrating the operations of acquired companies, including Pro Line.

Analysts expect a profit this year, but a smaller profit next year. The consensus earnings per share estimates, as compiled by Bloomberg LP, are $1.74 per share for the year ending Dec. 31, 2009 and $1.26 for 2010.

The company doesn't gild the lilly.  According to R.R. Donnelley’s annual report for 2008, “The industry environment has been difficult for a number of years,” and although the impact of competing innovations such as digital printing, print-on-demand, and the Internet have not been “significant to date,” it is expected to increase.

Furthermore, the company said, it expects “further consolidation of printers, customers and suppliers during 2009, which may result in continued price pressures.”  It expects the industry to continue to shrink. Overcapacity, the company went on, has had a negative impact, causing “downward pricing.” It said the coming consolidation “may increase competitive pricing pressures due to competitors lowering prices as a result of synergies achieved .”

Echoing the gloom, the National Association of Printing Leadership (formerly National Association of Printers-Lithographers and National Association of Photo-Lithographers), stated last month that industry confidence “remains near record-low territory” due to current economic conditions. The report said the 9.3 percent slide in industry-wide sales in the fourth quarter was the steepest drop for any three-month period in more than 20 years.

In addition to lamenting reduced demand across the print industry and that “profits continue to get crushed,” the NAPL’s February report declared that an economic turnaround will not return the industry to its previous footing. The association's report, much like its January report, emphasized that the printing is undergoing structural change, and that change means market share reallocation.