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Dismal Near-Term Outlook for Commercial Printing Industry

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The Zacks Commercial Printing industry comprises companies that primarily engage in providing customized printed products and graphic designs. Commercial printers serve large corporates, small businesses and graphic professionals among others. Some of the products offered by commercial printers are business cards, banners, logo apparel, catalogues, calendars and packaging. Printing is done primarily on paper, glass, plastic and apparel products.

Also, some printing companies are engaged in providing technologies and services for document management to customers in the retail, technology, financial services, architectural, engineering, construction, food, entertainment and hospitality industries.

Here are the industry’s three major themes:

  • Commercial printers are gaining from growing digitization, easy access to raw materials, the availability of a highly skilled workforce and use of technologically advanced equipment. Also, product manufactures tend to spend more on advertising their products to leverage benefits from high demand (created by higher personal income, lower taxes and availability of higher-wage jobs among other factors) and stay competitive. It is worth mentioning here that revenues of the commercial printing industry has increased roughly 4% CAGR in the last three years (2016-2018) while year-over-year increase of 1.7% has been recorded in the first nine months of 2019.
  • In addition to advertising, demand for commercial printers has increased in office products, directories, labels, catalogues and documents management services, to name a few. Such diversification in revenue sources is a boon and helps in mitigating concentration risks. However, ARC Documents Solutions, Inc. (ARC - Free Report) — a prominent player in the industry — relies heavily on the architectural, engineering, construction and building owner/operator industry for sourcing the majority of its revenues (roughly 79% revenues were sourced from this industry in the first nine months of 2019).
  • Commercial printers face severe threats from the growing popularity of online media. These companies are also exposed to competition from big and small players within the space as well as from equipment manufacturers that provide similar services. Further, commercial printers have to invest heavily in equipment and talent to derive economies of scale and keep pace with changing technologies. However, heavy investments can make companies highly leveraged and force small players to exit the business or collaborate with larger ones. For instance, long-term debts of Cimpress N.V. (CMPR - Free Report) have witnessed a 13.5% CAGR in the last five fiscal years (2015-2019), while the metric at $1.7 billion at the end of first-quarter fiscal 2020 (ended September 2020) represented a 41.4% increase from the year-ago figure.

Zacks Industry Rank Indicates Bleak Prospects

The Commercial Printing industry is a 5-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #218, which places it in the bottom 14% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of bleak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for the current year have moved down roughly 69.2% from November 2018.

Before we discuss a few stocks in the industry, we take a look at the industry’s shareholder returns and current valuation.

Industry Underperforms S&P 500 & Sector

The Zacks Commercial Printing industry has underperformed its own sector and the S&P 500 over the past year. The stocks in this space have collectively declined 5.5% compared with the Zacks Industrial Products sector’s growth of 8.6% and the S&P 500 gain of 17.2% in the said time frame.

                                            One-Year Price Performance

Commercial Printing Industry’s Valuation

EV/EBITDA ratio is commonly used for valuing commercial printing stocks.

The industry’s forward 12-month EV/EBITDA ratio is 9.73. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 12.22 and the sector’s 16.6.

Over the past five years, the industry has traded at the highest level of 18.55x forward 12-month EV/EBITDA and the lowest level of 5.76x. The median level, over the same period, was 11.16x.

             Commercial Printing Industry’s Valuation Versus Sector

             Commercial Printing Industry’s Valuation Versus S&P 500

Bottom Line

Increasing use of commercial printing services in diversified applications as well as favorable tax policy changes and better personal income should help the stocks. However, headwinds from leveraged balance sheets, stiff competition and preference for alternative advertising media have clouded the near-term outlook of the industry.

Of the five stocks in the industry, below we discuss four stocks in brief:

Issuer Direct Corporation (ISDR - Free Report) : The Morrisville, NC-based company currently carries a Zacks Rank #2. In the past year, the stock has decreased 9% while an increase of 11.5% has been recorded in the past three months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, the earnings estimates for 2019 and 2020 remained stable. The estimate for 2020 suggests year-over-year growth of 23.4%, while that for 2019 implies a decline of 17.5%.

                                          Price and Consensus: ISDR

Cimpress N.V. (CMPR - Free Report) : This Venlo, Netherlands-based company, carries a Zacks Rank #3. Its shares have increased 13% over the past year.

In the last 60 days, the Zacks Consensus Estimate for earnings has increased 22.4% for fiscal 2020 (ending June 2020) and declined 1.6% for fiscal 2021 (ending June 2021). On a year-over-year basis, the estimate for fiscal 2020 suggests growth of 28.5% and that for fiscal 2021 indicates a 4.5% increase.

                                      Price and Consensus: CMPR

Kornit Digital Ltd. (KRNT - Free Report) : This Israel-based company currently carries a Zacks Rank #3. The company’s stock has increased 46.9% in the past year.

In the last 60 days, the earnings estimates for 2019 and 2020 remained stable. The estimates for 2019 and 2020 imply year-over-year growth of 16.2% and 94.2%, respectively.

                                     Price and Consensus: KRNT

LSC Communications, Inc. : The Chicago, IL-based company carries a Zacks Rank #5 (Strong Sell). The company’s stock price has decreased 95.6% over the past year.

In the last 60 days, the Zacks Consensus Estimate for earnings moved into negative territory for both 2019 and 2020. On a year-over-year basis, the estimates suggest a decline of 117.1% for 2019 and 338.1% for 2020.

                                        Price and Consensus: LKSD

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