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Showing posts with label ARC Document Services. Show all posts
Showing posts with label ARC Document Services. Show all posts
ARC Document Services reported a predictably soft third quarter, given difficult
end markets, and the secular shift away from traditional reprographics
services.Simply put, customers are
printing less, and moving instead to cheaper and more efficient digital
distribution.In fact, in September, for
the first time, large format black and white printing accounted for (just) less
than half of ARC’s revenues.In response
to this shift, the company cut 10% of its staff, and more than 10% of its
locations in October, in order to squeeze unnecessary costs out of a declining
business.The focus is now on devoting
resources to the growing areas of managed print services, high-quality color
printing and digital services.ARC has
landed several large contracts with multi-billion dollar firms, giving some
visibility in future years.In managed
print services in particular, ARC has a solid competitive advantage, because it
can support on-site printing with company branches located nearby - for
example, to handle printing overflows.
Given the declining
sales, margins have remained quite firm, and are almost certain to widen in the
future, as end markets come back to life, and costs come down.Operating cash flows, too, were a solid $14
million in the quarter, and at $31 million for the first 9 months, were up
slightly year-over-year.Capital
expenditures, though they remain fairly low, have risen in recent quarters, as
the company now purchases some equipment that it chose to lease in the past.The company reiterated previous operating
cash flow guidance, which is still expected to be $35-45 million.
My original analysis of ARC Document Services is here.
Disclosure: At the time this article was written, the author was long ARC stock.
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ARC Document Services (ARC) recently reported results for Q1 2012.The commercial construction market remains soft, resulting in a 3% drop in overall revenue, despite a 10% increase in FM/MPS.Gross margins contracted slightly, as well.On the positive side, operating cash flows increased year-on-year, capex fell slightly despite new investments in growth, and ARC continues to trim net debt.The company reaffirmed guidance for operating cash flow, which is expected to range from $40-50 million.
Overall, the quarter was in line with expectations, though the softness in the commercial construction market may have surprised some.The company will continue to rationalize assets, keep costs low, open new markets and continue paying down debt. As the market strengthens in the years to come, the company is well positioned for very profitable growth.
Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.
ARC Document Services' (ARC) primary business
is providing document management services, document distribution and logistics,
and print services to the architectural, engineering and construction
industries. The company provides "blueprints," the drawings that are
the universal "language" used in all aspects of the construction
process, used by developers, architects, contractors, sub-contractors,
suppliers etc. (up to 200 different types of trades are involved from start to
finish on a large construction project, and many use these drawings).
Documents change constantly as a project progresses, and
the changes must be tracked accurately, quickly and confidentially. The
documents are generally larger than 11" by 17" and require
specialized printing and finishing, and a deep understanding of construction
work flows. Indeed, thousands of documents may be printed over the course of a
single large project, a major feat of logistics and organization. ARC also
houses company-owned equipment in customers' offices as part of their
Facilities Management services, and in some cases customers outsource their
entire printing and document management operation to ARC. In addition, ARC
offers document management and printing services outside the construction industry,
including to the retail, aerospace, entertainment, and health-care industries,
mostly in the areas of advertising and promotion.
Competitive Position
ARC spent the last decade consolidating the industry and
has established a dominant market position in a fragmented industry. Indeed,
ARC has over 200 locations, eight times as many as their nearest rival. Most of
ARC's stores are in the U.S., where they operate over 200 cities in 43 states.
In addition, they have a presence in Canada, U.K., India and China.
Most competitors are privately owned,
"mom-and-pop" shops that operate one or two locations, and generate
less than $7 million in revenue per store. The prolonged economic slump, which
has hit the commercial construction market particularly hard, has decimated
many weaker players. Whereas in the past ARC trumped the competition by buying
it, in recent years it has gained share as rivals have folded. The company may
pay several thousand dollars to buy a customer list from a defunct competitor,
rather than committing hundreds of thousands, or millions, of dollars to buy
the entire business. Besides small, strategic "tuck-in" purchases,
the company doesn't expect to make significant acquisitions in the future.
Scale gives them several competitive advantages: 1) A
large geographical footprint that enables ARC to take on regional, national and
global contracts that smaller competitors cannot; 2) As the industry moves to
offer more digital services, ARC can spread research and development spending
across many locations, but most competitors cannot (ARC has spent over $100
million in the past decade on technology innovation); 3) Economies of scale
make ARC one of the lowest cost producers in the industry; 4) A large installed
base of the company's equipment in customer offices ensures repeat business -
"stickiness" - and studies show that such customers tend to use more
services than they otherwise would.
Financials
The company enjoys high margins and a variable cost
business model (55% of costs are variable), allowing it to produce significant
free cash flows, even in a weak economy. In addition, maintenance capital
expenditure requirements are modest, averaging about 1.6% of sales, or $7-10
million per year. Though ARC will invest a small amount of added capital to
grow, overall capital expenditures should not exceed $15 million annually. The
company believes it can double sales from the existing footprint - by adding a
second and third shift - and doesn't expect to pursue a significant acquisition
program in the future. This means that happy shareholders are likely to benefit
from dividends and share buybacks in the future, though not until the company
has further paid down debt.
**defined here as operating cash flows, less capex
Management
CEO
"Suri" Suriyakumarhas been with the company since 1989. He was President and COO from 1991
until 2001, when he became the CEO. The leadership team is experienced, having
navigated through several business cycles and a range of economic, financial
and political challenges. In addition, management owns 19% of the company, and
are paid only modestly on an annual basis, aligning their incentives with
shareholders'. The CEO is honest, energetic and capable. He has assessed the
current tough market soberly, resized the business accordingly and has never
pretended that a robust recovery was upon us. It must be admitted, though, that
the company amassed too much leverage in the pursuit of acquisitions in the
past.
Valuation
The company can realistically hope to generate as much
free cash flow at the top of the next cycle as it did at the top of the last
one. After all, the US economy will likely have expanded by 15-20% overall, the
company has taken significant market share from competitors, and it has
expanded into adjacent, high-margin markets. Furthermore, at the top of the
last cycle, the company had a very substantial debt load, with large related
interest payments (around $25 million per year). However, within the next few
years the company will likely pay down most or all of its debt, so interest
payments will be negligible in a few years.
Assuming FCF peaks at around $120 million, and a multiple
of 12x, the company's market value would stand at $1320/45 million shares =
$32. Moreover, once debt is paid down, the company's FCF will be available for
tuck-in acquisitions, dividends and buybacks, adding further value for
shareholders. From today's $5-6 share price, the investment is a screaming,
table-pounding buy.
Conclusion
ARC's markets typically lag behind the general economy by
12-18 months. Since this recovery is slower than most, it is possible that the
company won't see a return to significant growth until 2013 or 2014. In the
meantime, however, ARC is gaining market share, as smaller competitors close or
are acquired, paying down debt, and investing in improvements to technologies.
Having rationalized their store base in the past few years, the company has a
much leaner cost structure, and will realize significant FCF as it returns to
growth.
Risks
ARC has a significant amount of debt and high interest
payments.
The company has grown mostly by acquisition in the past
(140 locations since 1997). If further tuck-in opportunities do not arise, they
may have trouble growing beyond past results.
Over 30% of sales are in a single state (California).
About 70% of sales are to commercial construction
customers, which has been a weak market and may not pick up for some time.
Sources:
Financial filings and presentations that can be found on
the company's website:http://www.e-arc.com/
There's ongoing
commentary on ARC: Here is an update on the first quarter of 2012
Disclaimer: The host of
this blog shall not be held responsible or liable for, and indeed expressly
disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog
