2023-03-24 04:38:48 ET
Summary
- Fiscal 2022 numbers exceed top-line guidance.
- Net debt continues to come down on the balance sheet due to elevated free cash-flow levels.
- The Large-scale print segment continues under pressure. Sustained investment to continue in Targeted print & Agency Solutions.
- Shares may continue to stagflate for some time to come. Investors need to remain patient until the bottoming pattern plays itself out in full.
Intro
Quad/Graphics, Inc. ( QUAD ) will continue to attract interest among value investors due to how cheap the majority of its valuation metrics fare out at present. In fact, if one looks beyond the company's earnings multiple, Quad/Graphics' assets, cash flow, and sales in particular all look to be trading at steep discounts compared to what we have been used to in this company. Suffice it to say, having all four of the company's major valuation multiples in positive territory (alongside a return to profitability) definitely brings longevity to this setup if one is considering long exposure in this play.
Valuation Multiple | Quad/Graphics (Trailing) | Quad/Graphics (5-Year Average) |
Price To Earnings | 22.89 | - |
Price To Book | 1.26 | 1.61 |
Price To Cash-Flow | 1.42 | 2.41 |
Price To Sales | 0.06 | 0.10 |
Recent Q4 & Fiscal 2022 Trends
As we see below, there were a number of encouraging tailwinds in the company's fourth-quarter results . For one, we saw solid sales growth & adjusted EBITDA margin growth (8.9%) which trended well ahead of the full-year figure (7%). Furthermore, higher sales in Q4 led to top-line growth for the full fiscal year which resulted in the generation of better than expected $94.3 million of free cash flow.
Free cash flow is the most important metric in finance bar none, as it acts as the lifeblood of the stock, especially in difficult times. The reason being is that positive free cash flow enables a company to continue to reinvest (Or bring down leverage in Quad's case) even in a negative growth environment. This is especially true for Quad/Graphics as management is expecting an approximate 2.5% decline in net revenues for fiscal 2023.
However, free cash flow is expected to come in positive at roughly $70 million, which is key. Management believes this number is possible (In an expected no-growth environment) by remaining aggressive with its cost-cutting measures, increasing sale prices when the opportunity arises, and continuing to double down on performing areas such as Targeted print & Agency Solutions.
Furthermore, management is fully aware of how a rising interest rate environment will adversely affect net earnings and cash flow. Almost half of Quad's fiscal 2022 operating profit ($110.9 million) went towards servicing debt ($48.4 million) last year so the sustained reduction of debt on the balance sheet remains a top priority.
As we see below, Quad's net debt continues to come down with another significant tranche expected in fiscal 2023. This trend of lower leverage really adds to the valuation case made above in that the lower Quad's leverage goes, the more protected its cash flows will ultimately be. Moreover, this sustained debt reduction plan is taking place alongside growing capital expenditure ($70 million expected to spend in fiscal 2023) where the company's integrated marketing platform is expected to go from strength to strength.
Technicals
However "timing" a long play in a stock such as Quad is crucial as the market may not reward the stock over the near term, especially if the 2.5% forward-looking top-line run rate comes in worse than expected. For example, if we go to the intermediate chart of Quad/Graphics, we see that shares look to be undergoing a bottoming pattern (which dates back to 2020) but have not been able to maintain a sustained pattern of higher highs to date. Furthermore, given how the upward trend since October of last year has been steadily weakening, we do not foresee an additional breakout attempt in Quad/Graphics anytime soon.
In fact, if we zone in on Quad/Graphics' recent share-price action on the daily chart, we see that a bullish volume trend has not coincided with the rally we have seen in shares over the past 10 days or so. Therefore since we believe that volume trends precede share-price action, we would be cautious with respect to buying Quad/Graphics at its current level ($4.14 per share).
Conclusion
To sum up, we believe the multi-year basing pattern in Quad/Graphics shown in the intermediate chart above is indicative of how the company can continue to generate elevated levels of free cash flow in what has become a difficult trading environment. Although this brings limited downside risk in this play, investors may have to be patient here before the next significant leg up can begin in earnest in Quad/Graphics. We look forward to continued coverage.
For further details see:
Quad/Graphics: Financially Sound But More Growth Needed To Move The Needle