Sunday, April 23, 2006

Courier Corporation- Great Biz but Full Price

Courier Corp (CRRC) is a successful book manufacturer and publisher. As a manufacturer, it provides services from pre-press to production to storage and distribution. This represents about 85% of revenues. There are over 400 book publishing customers.

As a publisher, its subsidiary Dover Publications publishes 9000 titles in specialty categories such as poetry, classic literature, and mathematics. Its subsidiary Research Education Association publishes test preparation and study guides.

Gideons International bibles represent about 28% of sales and have been consistently at this level for at least the last three years. Sales to Pearson PLC are also significant at 19%.

Sales growth for the last five years has compounded at merely 3.4% about one third the sales growth rate of the S&P 500 but earnings per share have compounded for this period in line with the S&P at 13.6%.

The balance sheet is debt free with a cash balance of $1.63 per share. CFFO has exceeded net income every year for at least the last five years. In this period, the company generated just over $150 million in cash flow from operations. Capex has totalled about $62 million for this period, so there has been significant free cash flow.

In October, the company purchased Moore Langen , an Indianapolis based printer specializing in book covers and known for innovative production techniques. This printer should expand the educational business of CRRC.

The company has returned capital to shareholders primarily through dividends which have grown at an 18.5% pace and in fact were almost doubled last year. There is still room since the payout ratio was only about 18%. Nothing to speak of in share buybacks in recent history/

This is a business that I would love to own, but its valuation is a little problematic to me. The stock has been a rocket this year, up about 25%. EV/EBIT is about 15 times for a business whose return on invested capital is about 14%. On a P/E basis, the company is near its peak on TTM earnings.

Insiders own some 19% of the business on a fully diluted basis.

The analysts have pegged a growth rate of only 5% for the next five years for CRRC. This seems quite low...if correct, in my opinion, the stock should be selling closer to the low $30's, not $43. If growth is closer to my belief of 8%, the stock becomes much more interesting to me in the mid $30's.

But remember, this company has a lot of freedom to do a lot of interesting capital restructuring if it choses. The balance sheet, being squeaky clean, could use some debt to finance share buybacks or expand the business. The dividend has lots of room to grow. As the company says in its website, "To be able to succeed year after year, across the ups and downs of the economy, is very satisfying."

It seems to me that purchases at today's price might not be quite that satisfying.
Neither I, nor my family or clients have a current position in CRRC.


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