Direct mail dinosaur fights extinction
Posted on April 22, 2009 by Richard Beddard
Filed Under Companies |
Debt isn’t the only liability that matters.
Initially I thought Communisis (CMS) was going to be one of those companies where the numbers look good but the words are indecipherable. I’ve had to read its annual report, published on 25 March, quite carefully to work out what it does, being a newcomer to the business of direct mail. On the other hand I’m no stranger to the product. It’s shoved through our letterboxes every day.
Communisis has the dubious honour of running Europe’s largest direct mail factory in Leeds, seven printing presses which churn out marketing literature for companies and charities. Its biggest business though, is producing bills, statements, cheques and payslips and it also operates as an IT consultancy and software vendor allowing customers to produce and manage their own mail (see this video of Hewlett Packard Exstream Dialogue if, like me, you need an introduction to the software).
Direct mail looks like another business disrupted by technological change. While Communisis is printing 10% fewer cheques every year, it’s sending out 300,000 emails a month for Centrica. It’s latest acquisition, Absolute Intuistic, doesn’t even produce direct mail, but organises customer data and predicts their behaviour, marketing services Communisis thinks it can combine with its services and sell to its customers.
The pace of change makes Communisis a tricky proposition for value investors, both in terms of producing direct mail, where the company is investing in digital printing precess, and in terms of alternatives. Just as the Internet is an alternative to newspapers, it’s also an alternative to direct mail, as more of us elect to receive bills and statements by email, for example.
The company also has a ring-side seat at the credit crunch because many of its customers are financial companies and some “financially stressed” banks cancelled “virtually all” of their direct mailings last winter. It’s assuming reduced sales throughout 2009, but it would be naïve to assume things will necessarily improve soon after.
Communisis is cheap, judging by its ten year price earnings ratio of four. But the problem is a company’s record of profit is not that reliable a guide to the future if the basic economics have changed.
Change can also have a corrosive effect on a company’s assets. Cash, is a very dependable asset but when its spent on acquiring a new business and its translated in part into goodwill, its much harder to value. If the business fails to perform as expected, write-offs invariably follow. On the other hand a newly acquired business could be a major source of future profit.
So although it’s cheap, and it owns more than it owes, Communisis is a bit speculative.
I’m not ruling it out as a safety first stock yet, though. The comparison with newspapers may be imperfect. For a start, Communisis is in good financial nick, having reduced its long-term debt significantly and while newspapers can’t work out how to profit from their new internet operations, Communisis’ Technology and Services business is comparable in size to Direct Mail and earned about a fifth of total operating profit in 2008. By turnover, though, low-margin printing still dominates, which is business the company is trying to move away from.
The directors seem confident, being net buyers in recent years, but Communisis does have one thing in common with other ageing businesses, its massive pension fund.
Despite having paid £17m into its pension since 2005, the deficit has stubbornly persisted thanks to the diminishing value of its investments. The company plans to pump in £8m more this year, which, assuming the stockmarket doesn’t crash again, will reduce the deficit by 75%.
It’s good that Communisis thinks it can spare the cash, but it’s also a reminder to investors, that debt isn’t the only liability that matters.
In theory:
Another year, another budget day
Just in case you hadn’t noticed, it’s budget day, the worst day of the year for financial journalists. I can’t begin to describe the horror of it, so I won’t, and happily I wasn’t involved in Interactive Investor’s coverage this year, which means I might actually go and read/watch it later, and see what I missed…
Comments
2 Responses to “Direct mail dinosaur fights extinction”
Leave a Reply
Its sounds good, the information is very productive and informative. Marketing firms are now offering few of the services like creative design, consumer data, printing, fulfillment, analytics and website solutions. Good to see these kinds of services.
This is an informative post.Businesses and organizations customize these direct mail pieces for employee or customer mailings, including bills or employee payment stubs.