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Analyst Blog

On May 17, 2013, Zacks Investment Research downgraded R.R. Donnelley & Sons to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Donnelley reported first quarter 2013 non-GAAP earnings of 37 cents per share, which comfortably surpassed the Zacks Consensus Estimate by 4 cents. However, earnings per share declined 15.9% year over year, primarily due to margin contractions.

Revenues for the quarter were up a modest 0.5% year over year to $2.54 billion. Operating margin contracted 40 basis points (bps) on a year-over-year basis to 6.8% due to certain customer rebate adjustment, price pressure and unfavorable product mix.

Donnelley reiterated its fiscal 2013 guidance. For fiscal 2013, Donnelley expects revenues to be in the range of $10.1 billion to $10.3 billion, which remains flat compared to 2012.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) are expected to be in the range of 11.2% to 11.4% for fiscal 2013, which is slightly lower than 12.0% reported in 2012.

The Zacks Consensus Estimate for the second quarter of 2013 has declined 17.0% (8 cents) to 39 cents over the last 60 days.

The Zacks Consensus Estimate for 2013 decreased 9.5% (16 cents) to $1.53 per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 6.6% (10 cents) to $1.52 per share over the same period.

Other Stocks to Consider

Not all printing and outsourcing services providers are performing as poorly as Donnelley. We recommend Barrett Business Services (BBSI - Snapshot Report), which has a Zacks Rank #1 (Strong Buy). Genpact Ltd (G - Snapshot Report) and Convergys Corp (CVG - Snapshot Report), both having a Zacks Rank #2 (Buy), are also looking good at present.

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