ACCO Brands Corporation (NYSE: ACCO): Cheap Valuations Provide Margin of Safety to Investors

ACCO Brands Corporation (NYSE: ACCO): Cheap Valuations Provide Margin of Safety to Investors

Shares of office supplier ACCO Brands (NYSE: ACCO) fell last week after it reported a slower than expected fourth quarter. Despite this decline, shares are still up by 9 percent for the year. Shares have traded in a 52-week trading range of $5.80 to $13.30. The company reported a net loss of $12.5 million; equivalent to $0.11 per share. This is compared to the previous year’s net income of $9.4 million or $0.16 per share. Excluding restructuring costs, acquisition expenses and other items, adjusted earnings per share is $0.37. This would have been in line with consensus analysts’ expectations.

ACCO reported revenues of $529.7 million for the quarter, an increase of 51 percent compared to the same period last year. This easily exceeds the consensus revenue estimates of $541.1 million. The better than expected revenue figure is largely attributed to the addition of MeadWestvaco Corporation’s (NYSE: MWV) consumer and office business. ACCO paid $860 million for this acquisition last year. In return, the company gained popular brands such as Mead, Five Star and Trapper Keeper. On a like-for-like basis, revenues would have been flat as the company experienced sluggish sales amid tough an economic environment.  

Moving forward, management believes that the company is poised for strong earnings in 2013. The company expects to earn about $0.95 to $1.05 per share for the fiscal year 2013. This is in line with analysts’ earnings estimates of $1 per share. For the next 5 years, analysts have forecasted earnings of ACCO to grow by 10.28 percent a year. This is a significant improvement from its average earnings decline of 2 percent a year over the last 5 years.

Analyst Downgrades

Analysts have recently downgraded the stock from buy to hold. It has a mean target price of $10.67 per share, translating to an upside of 32 percent. The reasons for the downgrade include unimpressive growth in net income, weak operating cash flow and higher debt management risk. At present, the company has negative operating cash flow and carries debt to equity of 1.67 times. While the reasons for the downgrade appear valid, the company has paid down $200 million in debt during the quarter, $75 million more than it had originally planned. ACCO will also focus on improving its balance sheet which will allow the company to pursue value accretive growth in the coming years.

Cheap Valuation Outweigh Risks

The stock is currently valued at 6.48 times earnings. This is significantly lower than its 5-year earnings multiple band of 25 times to 64 times, as well as the average industry’s valuation of 13 times earnings. Big-cap office supplier 3M Company (NYSE: MMM) trades at 16.33 times earnings and carries a dividend yield of 2.50 percent. Another peer, Avery Dennison Corporation (NYSE: AVY) is valued at 19 times earnings and has a dividend yield of 2.70 percent.

While the stock carries certain risks, its low valuation provides significant margin of safety for the enterprising investor.