makes its money by helping consumers pinch pennies. The printing firm is best known as the leading printer of coupons for circulars that appear in newspapers' Sunday editions.
The company reaches some 60 million households each week, through deals with more than 500 of the country's top newspapers. Last month, Valassis also closed the $1.1 billion purchase of direct-mail marketing firm Advo, which was first announced in July 2006.
While Valassis shares are up 19% year to date, closing Tuesday at $17.25, the stock remains 26% lower than where it traded before the Advo deal was announced. With that in mind, I'm here to answer readers' questions: Should I do it? Will Valassis' recent rally get clipped, or can the stock continue to push higher throughout 2007?
The recovery in Valassis shares began when the company delivered better-than-expected fourth-quarter results Feb. 7. Valassis earned 43 cents a share, excluding merger costs, which was 3 cents ahead of the consensus analyst estimate. Revenue fell 7% from the previous year to $286 million, with the focus in consumer advertising shifting from the mass market toward targeted campaigns in recent years.
According to management, this was the thinking behind buying Advo, whose sales
year over year in the fourth quarter. In addition to realizing an expected $15 million to $20 million of annual cost savings from combining the two businesses, Valassis management believes it can cross-sell services to customers, as there was little overlap between major customers of the two firms.
Valassis paid cash for Advo, with the bulk of the financing coming from a $540 million offering of 8.25% coupon bonds maturing in 2015, completed at the end of February. The company also secured $870 million of borrowing capacity through bank loans. These deals pushed the company's borrowings to a hefty five times shareholder equity, but I believe that management can achieve its targets and generate enough steady cash flow to make the deal pay off in the long term.
On a pro forma basis, the new Valassis is expected to generate $2.5 billion to $2.6 billion of revenue and $260 million of operating cash flow in 2007. The company also expects to generate about $60 million of free cash flow this year and more than $100 million in 2008, all of which will be earmarked to paring debt. With the only major principal payment due on the horizon being $100 million in January 2009, I believe that Valassis remains on stable financial footing.
At current levels, the company trades at 14.4 times expected 2007 earnings of $1.20 a share. While profit has declined in four of the past five years, Valassis stock is trading at a 25% discount to its historical average valuation. Including a full year of Advo results in 2008, the company has guided to 17% earnings growth to $1.39 a share.
So yes, I do believe that Valassis remains attractive to purchase at current levels. The stock's decline over the past year reflects the company's past earnings problems, but I don't believe the company is being credited with the higher margins that can result from the Advo purchase. With that in mind, Valassis shares could continue their run over the coming quarters and trade up through $20.
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David Peltier is a research associate at
. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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