Investment idea: Deluxe Corp.

[brewer12345]

Just looking to kick an idea around if you guys don't mind. I've been doing very well with companies that the market has left for dead lately, most recently MOVI. DLX certainly seems to be a candidate for some bottom fishing.

Deluxe is the largest check printer in the country. They sell their checks direct to consumers, via financial institutions, and to small businesses. Check volumes have been steadily declining in recent years, and this should continue for some time. In the meantime, DLX has expanded its range of products and services for small businesses and worked on cost efficiencies in the check business. They bough New England Business Services last year to bulk up their small business offerings, and the acquisition seems to be going well.

The company is trading pretty cheap. Looks to be approx. 12X forward earnings. DLX pays a fat dividend (~4%) which is amply covered by earnings. The company levered up to finance the NEBS acquisition, but will likely be paying down some of this debt in the next few years. They also have a history of large stock buybacks, which I think makes sense in a flat to declining business with fat cash flows. Buybacks are probably on hold for a year or two until they pay off some debt.

One odd thing I have ran across is that Eddy Lampert owns about 10% of the company. He is the guy who bought control of KMart as it came out of bankruptcy. He also effectively controls Autozone. In both cases, he bought into a sleepy, slow growth company and started basically shoving speed down its throat to charge up performance. As KMart and Autozone show, results have been pretty good under this strategy. It is unclear whether this will be the case with DLX, but the CEO has announced his retirement, so its hard to believe that they won't hire someone who will shake things up.

Any thoughts on this one? I know individual equities aren't everyone's cup of tea, but this one does sport a nice dividend and I think it is a big holding in DVY.

 

[wildcat]

I have looked at Deluxe as well. Very profitable company and seem to very shareholder friendly. I first started to look at them @ $35 but never moved on it. Am I correct by saying they are expanding into new markets? From what I have read about Lampert that doesn't seem to be his gig. Lampert seems to go after CF rich companies that can buyback stock & get rid of the of the fat. I also kind of hesitate to buy companies that acquire others but NEBS seems to be a decent fit. What do you think? But I figure I would rather be with Lampert & if the company could just grow the top line 3-5% then an investor should do well.

 

[brewer12345]

The acquisition of NEBS looks more like a consolidation play than a venture into new territory. This makes a lot of sense in a flat or declining industry, since the biggest and most efficient players should be able to starve the little guys to death while still making money. I also think that NEBS allows them to grow in the small business market, which should be attractive in a rising economy that isn't creating a lot of jobs (more dispossessed workers start businesses and buy stuff from NEBS/DLX).

I built a very simple valuation model based on an assumed 10% cost of equity and valuing the company based on free cash flow (about $4 per share expected in 2005). It looks a lot like the market is valuing this company as if it will not grow free cash flow at all in the next 10 years, which seems hard to believe. I think that an appropriate valuation is more like $44-45. Today's price is a modest discount (~12%) to this estimate, so its not really enough to get me excited. However, if we see the price decline to, say, 36, I will be really interested. The company also has a pretty good sized following among the shorts, which I tend to regard as a plus.

 

[Nords]

I went against Eddie Lampert with KMart because I couldn't believe the stock price with double-digit declines in same-store sales.

I won't make that mistake twice.

If Eddie is involved, it's probably because he's figuring out a way to combine it with Sear's finance operations and KMart's, uh, whatever the heck he gets out of that store. (Oh, yeah, cheap bonds & shareholder equity.)

So it sounds like your homework & research merits 5% of your high-risk portfolio. Maybe mine too-- thanks!

 

[Berkshire_Bull]

I wouldn't bet against brewer on this one. We talked about MOVI a while back and guess what? HE moved on it and I sat on my ass big mistake. Anyway, DLX might be a good buy, it will remain to be seen, unfortunatelly I don't have any extra cash laying around.

 

[brewer12345]

Hey, FWIW guys I am not jumping into DLX right now. Like Berkshire, I don't have any cash burning a hole in my pocket. I also have found that you make big returns on slower-moving, high div companies by buying at the right price. Accordingly, I won't be buying unless DLX hits 37 or so, especially since I would have to sell something to buy it. If we get to 37 or below, I will be piling in, though.

Oh, and fer Gawd's sake: do your own due diligence. Please do not take my comments as more than a starting point for your own research.

 

[brewer12345]

I went against Eddie Lampert with KMart because I couldn't believe the stock price with double-digit declines in same-store sales.

I won't make that mistake twice.

If Eddie is involved, it's probably because he's figuring out a way to combine it with Sear's finance operations and KMart's, uh, whatever the heck he gets out of that store.  (Oh, yeah, cheap bonds & shareholder equity.)

So it sounds like your homework & research merits 5% of your high-risk portfolio.  Maybe mine too-- thanks!

Nords, I think that part of the motivation was the RE that KMart controls, right? Looking at DLX' 10K, I note that they own an awful lot of real estate for a smallish company. Its on the books at historical/depreciated value, so likely well under actual market value.

 

[cute fuzzy bunny]

Real estate was exactly the motivation. Most sears and kmarts are co-located, and either one or the other, sometimes both, in the same city are on very expensive pieces of real estate. You close one, sell the RE or rent it, open a combo /k-ears (seamart?) store and reap the benefit.

Here in Yuba city we have a tiny sears as a mall anchor, its about 1/4 the size of most sears and has a warehouse area about the size of my living room, hence stocks no appliances or large tools. Almost everything I've bought from them, from lawn mowers to dehumidifiers to the dishwasher I'm waiting for right now has to be ordered in. Theres a k-mart about 2 long blocks away sitting in the middle of a huge parking lot. Aisles so wide you can actually get by the chuckleheads who skew the cart sideways and then stand there vacantly staring at shelf after shelf of cheap crappy merchandise. I'll bet the rent on that little mall anchor spot is pretty dang high. And I'll bet sears would like to have a little room for appliances.

 

[Nords]

Oh, and fer Gawd's sake: do your own due diligence.  Please do not take my comments as more than a starting point for your own research.

Hear you loud & clear, Brewer, and I always do my own due-do that we doo-doo so well. It's either that or trying to catch a few more Nortel falling knives.

Keep the ideas flowing!

 

[Nords]

Real estate was exactly the motivation.  

Last summer KMart reported something like a 15% same-store sales decline, even as Lampert was apparently desperately hiring retail-sales gurus left & right.  At $77 the stock was clearly overpriced.

What really ticked me off about Lampert's S-Mart announcement is that it came out on the same exact day as another 10Q reporting yet another 13% YOY same-store sales decline.  Not that anyone was paying attention to the filing, what with the three-ring food-fight happening over at Kears.

Another troubling question is the sale of KMart sites to Sears.  That was announced a couple months before the merger.  Now that the merger has consummated, did Sears indeed transfer assets to KMart for this sale?  How is it being deconflicted reported?

I won't bet against Lampert anymore.  But I won't invest with him, either.