February 25, 2008 - R.R. Donnelley & Sons Co. (RRD-NYSE) produces magazines, catalogs, and books, as well as advertising material, business forms, financial reports, and telephone directories. The company offers graphics and prepress services in conjunction with printing; in addition, it provides logistics, distribution, and business process outsourcing services related to getting printed material to its audience. Along with publishers, R.R. Donnelley's customers include companies in the advertising, financial services, health care, retail, and technology industries. The company does business mainly in the US, but also in Europe, Asia, and Latin America.

In the last 5 years, revenues have, on average, decreased by 3.5% a year while earnings have increased, on average by 2.5% a year. In the next 5 years, analysts believe earnings will grow by 12.5% a year on average on revenues increasing by 10% a year, on average. Look for $2.90 in earnings for 2007 with the final quarter bringing in 76 cents a share. Next year expect $3.15 a share. Revenues for 2007 should finish around $11.6 billion. Expect $12.1 billion in 2008. The company will host a conference call on February 27 to announce earnings. Go the Web site (below) for full instructions on how to listen.

Part of the formula for success at RRD has been its dedication to state of the art equipment. That attracts and retains the highest level clients, ones who require the best looking printed materials such as high gloss magazines. Another reason for success: the company acquires niche printers such as Cardinal Brands, a private firm, which should contribute to earnings this year.

It also helps that a major competitor, Quebecor, filed for bankruptcy protection. It was doing $6.1 billion a year in revenues. RRD should pick up some of those clients and increase its market share.

Of course, all is not rosy. We are in a recession or about to be, depending on when the pundits declare it. In the past, recessions have hurt earnings at RRD, as one would expect. The stock has been weak of late, in anticipation of the recession becoming official. Of course, the whole market has been weak, anticipating the same announcement.

The company generates lots of cash, more than it needs for operations. So it has been buying back shares, some in large blocks in 2006 and 2007, which required borrowed money to facilitate the trades. That debt should be paid back quickly due to excess cash flow. Current liabilities are 1.4 times current liabilities with $343 million in cash.

Other numbers: Market cap is $6.8 billion on 214.6 million shares. There's a dividend of $1.04 a share which takes about 35% of the earnings to pay. Net profit margin is 5.5%. Debt is 46% of capital. The P/E ratio of 11 hasn't been seen since 2000 and is the low end of valuation for the stock. The highest average annual p/e ratio was 21.5 in 1998.

R.R.Donnelley & Sons provides an important service. By keeping its plants and equipment the best they can be, it attracts and holds clients. There's excess cash flow for stock buybacks, increasing earnings or buying more companites. There's a lot to like about RRD. But if the recession becomes more severe, there's no question earnings projections will have to be cut back.

- Company Web site: www.rrdonelley.com

- Ted Allrich