Moore: A Printer with a Blueprint
By Massimo Santicchia
Moore (MCL ), an international leader in the management and distribution of print and digital information, is in the early stages of a major restructuring led by a very experienced management team that holds a significant stake in the company's stock. With several catalysts ready to lift the stock in the near term -- and a valuation that's below its industry peers -- S&P has given Moore its highest investment ranking, 5 STARS (buy).
Robert Burton, its CEO and chairman, is heading the daunting effort of restructuring and repositioning Moore for future growth. Burton's prior experience includes leading a former Kohlberg, Kravis & Roberts unit, World Color. During his nine-year tenure there, Burton led a dramatic turnaround, culminating in World Color's merger in the fall of 1999 with Quebecor Printing, today's world's largest and most profitable printing company. Burton's team comprises seven top executives with an average of 22 years of industry experience. (All of them worked together at World Color prior to joining Moore.)
The company operates in three complementary business segments: forms and labels (54% of net sales in 2001), outsourcing (16%), and commercial printing (30%). The forms and labels segment sells, composes, manufactures, warehouses, and delivers a wide range of printed and electronic communication products such as express "overnight" package labels, tax forms, "pressure seals" payroll checks, security documents, and digital documents printed "on-demand."
Moore's outsourcing business, Business Communication Services (BCS), is a leader in the document industry, providing high-quality, customized, transaction-based communication for financial services, telecommunications, and insurance companies. BCS delivers critical high-value documents, including daily confirmations, periodic account statements, checks, invoices, insurance policies, prepaid telephone cards, enrollment kits, privacy mailings, and yearend tax-reporting statements to over 700 customers throughout North America.
The commercial segment provides print services (glossy annual reports and brochures) and targeted direct-mail services, prints highly specialized technical publications, and handles delivery and warehouse management needs. Through Response Marketing Services, Moore provides integrated direct-marketing programs.
Since its arrival in late 2000, the new management team has been implementing a combined restructuring and growth strategy that has already resulted in the elimination of $100 million in operating costs in 2001. Management is targeting further cost reductions of $100 million over the next 12 to 24 months. The execs plan to reduce Moore's expenses through a combination of global purchasing initiatives, rationalization of manufacturing facilities, waste reduction, energy management, and decreased spending in information technology.
In an effort to build shareholder value, Moore brass has also been strengthening the balance sheet. One example: During the fourth quarter of 2001, Moore converted outstanding debt with a principal value of $70.5 million into 21.7 million shares -- reducing total debt by 20% and eliminating over $6 million in annual interest costs. It has raised about $50 million by divesting noncore assets. And Moore reduced its overfunded pension plan and expects to receive about $70 million after taxes and fees for establishing a new 401(k) retirement plan. In April, 2001, it even eliminated the cash dividend, saving $18 million per year.
As management continues to implement its restructuring plan, focusing on cash generation and management, we at S&P expect to see continued, solid improvement in operating profitability and strong free cash flow. The additional funds will be directed toward higher-margin, higher-growth businesses such as outsourcing and direct mail within the commercial printing-services segment.
In the fourth quarter of 2001, Moore launched a strategic corporate accounts and cross-selling initiative to increase revenue per customer. This "one-stop shopping" strategy offers the array of products, service, and solutions that exist within Moore to the top corporate accounts and should drive top-line growth even in a mature industry like printing.
In the U.S., that industry is very fragmented: Nine companies have sales of over $1 billion, about 50 companies have sales between $100 million and $1 billion, and 300-plus companies have sales between $15 million and $100 million. The rest of the market comprises more than 30,000 entities with sales under $15 million. Thus, while Moore has a large number of competitors in each business segment, the majority of its rivals compete with it in only one business.
The current sluggish economy, changing customer needs, and slower industry growth are sparking consolidation in the printing industry. Moore is in a position to make some desirable acquisitions given its financial strength, size, and competitive position. And it has been making some moves, like the January, 2002, purchase of Document Management Services (DMS) from IBM.
DMS is the second-largest print and mail service provider in Canada, with $23 million in revenues in 2001. Also that month, Moore acquired privately held Nielsen Co., one of the largest commercial printers in the Midwestern and Southeastern U.S. Nielsen had revenues of about $90 million in 2001. Management expects both acquisitions to add to earnings immediately.
Moore's top officers are not new to the takeover game. While at World Color, the current team integrated over 25 acquisitions that added to earnings. Management's stated goal is to acquire companies in the $50 million to $300 million annual revenue range, paying about 5.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). With a net debt-to-2002 EBITDA ratio of just 0.5 times, we estimate the company should be able to make acquisitions of over $500 million in the printing and outsourcing markets without increasing its leverage above 3.0 times EBITDA.
ROOM TO MOVE.
S&P projects that Moore will post net sales of $2.14 billion in 2002 and $2.15 billion in 2003, with a 5% decline in the forms and labels segment, partly offset by 16% growth in outsourcing and 2% growth in the commercial segment. As management restructures operations, total costs should be pared to $1.90 billion in 2002 and $1.89 billion in 2003. Operating margins should widen from 4.7% in 2002 to 6.8% in 2003. With interest expense at $19.8 million in 2002 and $18.3 million in 2003, at an aftertax rate of 27.5%, we see Moore reporting earnings per share of $0.51 in 2002 and $0.80 in 2003.
Using S&P's discounted cash flow analysis, based on our projections of free cash flow discounted back the cost of capital, we reach an intrinsic value per share of $18. If we evaluate each of the company's three businesses separately based on enterprise value-to-EBITDA multiples, we come to a per share value of $17.
Our 12-month price target of $17.50, which represents a potential increase of about 30% from Moore's recent price of $13.50, is determined by averaging the intrinsic value resulting from the two methodologies. At S&P, we believe that our earnings and valuation models have significant room for upside revision as we, conservatively, have not included any benefit from potential accretive acquisitions.
Analyst Santicchia follows emerging growth stocks for Standard & Poor's