RRD Wraps Up 8touches Acquisition - Analyst Blog

R.R. Donnelley & Sons Company (RRD) announced the acquisition of 8touches. Financial terms of the deal were not divulged.

8touches is an online provider of tools that enable real estate sales associates, brokers, Multiple Listing Service (MLS) associations and other marketers to create customized communications material such as direct mail, flyers and brochures.

R.R. Donnelley is actively engaged in making strategic acquisitions to enhance its geographical presence, facilitate the global outsourcing business and expand product and service offerings. Since 2007, the company has acquired 10 companies.

The acquisition of 8touches will help Donnelly expand its portfolio of proprietary Internet-based solution offerings. Management pointed out that 8touches' proven solution will benefit Donnelly's software development and distribution process.

Revenue growth for Donnelly is expected to come from development in digital technology. The integration of 8touches' front-end Internet services to Donnelley's digital printing services will accelerate digital printing and fulfillment platform and create targeted applications for industries and vertical segments.

Our Take

We believe strategic acquisitions are critical for R.R. Donnelley's growth, which will expand the company's printing services. We believe the company's continued focus on acquisitions will spur its already dominant market position and drive long-term growth.

R.R. Donnelley's third quarter 2010 earnings beat the Zacks Consensus Estimate. R.R. Donnelley continues to expect strong revenue growth for fourth quarter 2010 and fiscal 2011. Management did not provide any earnings guidance. The Zacks Consensus Estimate is currently pegged at 47 cents for the fourth quarter and $1.71 for full-year 2010.

The company's cost containment efforts, operating leverage, aggressive acquisition policy, debt repayment initiative, impressive cash flow and stable dividend payout will leverage growth. Moreover,a cyclical recovery in advertising, growth in logistics and digital business, broadening customer base and new product launches are long-term drivers of growth.

We believe strong alliances and customer wins such as the recent Prudential (PRU), AT&T (T) and Verizon Wireless (VZ) will create value for the company in the long term.

We are also impressed with Donnelly's aggressive dividend policy. The $1.04 annual dividend rate equates to an attractive dividend yield of about 6%, which adds to the total return on the stock.

The company is witnessing stabilization in demand, increase in volumes and new customer wins; however, foreign exchange movement and lower paper sales are expected to create significant headwinds to fiscal 2010 revenues.

Further pricing pressure and a highly leveraged balance sheet could limit near-term stock appreciation. We maintain our long-term Neutral recommendation on the stock.

Currently, the stock has a Zacks #3 Rank, supported by a short-term Hold rating.