Deluxe Corp.: Ugly Story, Beautiful Value

Cash Is King

When I said it wasn't pretty, I wasn't lying. But as much as I want to dislike this company (and stay away from it), the fact remains -- all the negativity may be priced in. In fact, it appears that investors are all but writing Deluxe off for dead. In some respects, I can't blame them. But the company's operations remain very profitable. This is a cash cow business.

In 2007, sales were $1.6 billion, and net income of $143.5 million translated into a very healthy net profit margin of 8.9%. During the same year, Deluxe generated $160 million in free cash flow (that's after paying $52 million in dividends). Year to date, the company has earned $60 million on sales of $749 million, for an 8% net profit margin (that's down from 8.8% from the same period last year, but still respectable). On a trailing 12-month basis, Deluxe has generated $119 million in free cash flow, so the company is currently trading at 7.28 times FCF.

Get Paid

Deluxe also pays shareholders a 25-cent quarterly dividend; the stock currently yields 5.94%. The company has cut its dividend in the past, but with a rather low current payout ratio of 40%, the dividend appears to be safe, at least for now.

Although sales are expected to decline in 2008 then level off in 2009, consensus estimates call for Deluxe to earn $2.60 a share in 2008, and $2.99 a share in 2009, so the company currently trades at 5.6 times 2009 earnings. Expectations are obviously low given this multiple. At a still-bargain-basement 8 times earnings, Deluxe shares would trade at $24 a share, 43% above current levels.

I told you it wasn't pretty; deep value usually isn't. In Deluxe's case, it isn't about assets, because there really aren't any to speak of. The question is whether a cash-generating business that has not been well managed is worth significantly more than its current price. I believe this one is. But Deluxe is certainly not for the faint of heart.

---

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.