Deluxe Corp.: Ugly Story, Beautiful Value

As a value investor, you won't always find solid, growing companies whose best days are ahead of them. What you sometimes find is a company that's not all that compelling, that has been all but written off for dead, but that may have some life left in them. Your job is to determine whether that company is worth more than its current price, irrespective of the growth case (or lack thereof), and whether the potential reward is large enough to justify the risk.

I have to admit, Deluxe Corp. (DLX - commentary - Cramer's Take) definitely fits into the "not pretty" category. The company has made some strategic mistakes in recent years, sales are declining and the stock is down 54% in the past year and 47% year to date. But we've heard this story before on Deluxe, and it prompts the question -- does the company have any lives left?

Probably best known as a provider of paper checks -- the company was called Deluxe Check Printers until 1988 -- Deluxe is the largest provider of check-printing services in the U.S.; this accounts for nearly 50% of company revenue. It's certainly not an exciting business, nor one that has many growth prospects, but the company does offer business services and products besides checks.

First, the Bad News...

Currently trading at 6.5 times trailing 12-month earnings, Deluxe's second-quarter sales fell 8% to $367.7 million, while net income fell 9.3% to $32.6 million. With businesses facing tough economic times, sales have suffered, and short of a new product or business, they may continue to slip. In fact, consensus estimates for 2008 show a 5% decline vs. 2007, with 2009 sales expected to be flat.

Truth be told, the balance sheet is not great either. Book value per share is a paltry $1.31, but when you back out the intangibles -- primarily goodwill -- tangible book value is -$12.70. The company also carries $774 million in long-term debt, which begins coming due in 2012 ($300 million), with further maturities in 2014 ($275 million) and 2015 ($200 million).

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At the time of publication, Heller had no positions in the stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.