Tuesday, May 25, 2010

Bookkeeping: Beginning Valassis Communications (VCI)

As mentioned about 3 weeks ago, I planned on broadening the sectors in the portfolio away from the tech heavy concentration I had for much of 2010. This selloff is also helping to expose those names in very strong hands versus what is in the palms of 'hot money' traders. The latter stocks work just fine in a market that rallies 4 out of 5 days (and always on Mondays) but I expect the market of March 09 to April 10 to be different than what we might see in the coming year.

One name that has impressed me is Valassis Communications (VCI) which actually sounds like half the tech stocks I own. But it is actually in the quite boring business of 'coupon mailings' - part cyclical but I do believe there is a secular story here as well, as many more Americans are being forced downstream in their economic lives. Two readers have actually notified me of the stock over the past year - one recently, and one maybe 6 months ago.

Valassis Communications, Inc., together with its subsidiaries, operates as a media and marketing services company primarily in the United States. The company operates in four segments: Shared Mail; Neighborhood Targeted; Free-standing Inserts; and International, Digital Media, and Services.

At $1.91 in EPS for 2010 the stock is quite fairly valued at 18x forward estimates, but the hope is the EPS figure is incorrect [range $1.77 to $2.13 via 5 analysts] - and either way the relative strength in the stock is stellar so it should be a buffer versus some of the more aggressive stocks in the portfolio.

I have never owned it before but have had one eye on it for many months; so the main question is how it performs to the upside, I assume the beta will be relatively low. For example, the stock did nothing for the months of March and April while the market roared (I imagine stock holders were very frustrated at that time)... whereas it has rallied in May while the market falls off a cliff. Further, perhaps it is fully valued and all the upside is in the stock; we'll see.


Believe it or not, this company (which was highly levered) was $1.53 at the depths of the 2009 crash as potential bankruptcy loomed ... of course *that* was the time to buy. With a $500M litigation settlement ($320M after taxes) with News Corp the balance sheet is looking *much* better now.

The rally in May has been based on late April earnings data which were very positive (full report here):
  • Valassis Communications Inc (VCI) posted a quarterly profit that beat market expectations, partly helped by lower costs, and raised its 2010 outlook, sending shares to their highest levels in over four years.
  • First-quarter net earnings were $322.5 million, or $6.26 a share, compared with $13.0 million, or 27 cents a share a year ago. Excluding litigation settlement proceeds, the newspaper coupon company earned 41 cents a share. Revenue fell marginally to $550 million in the quarter ended March 31, 2010.
  • Analysts had expected profit of 30 cents a share.
  • For 2010, the distributor of newspaper inserts now expects adjusted earnings of $2.79 a share, up from its prior view of $2.48.
  • The company said use of coupons and other advertising supplements is expected to continue to rise as consumers strive to save money, a trend expected to drive sales higher.
  • "Given their longer-term contracts enabling better visibility than many other media, Valassis' improved outlook seems achievable ... (and it) doesn't seem to require any heroic assumptions," Gilford Securities analyst Jim Boyle said in an email reply.
  • "First-quarter revenue was essentially in line, but more importantly it affirms that the several prior quarters' revenue declines during the economic recession (and advertising depression) is largely behind us," Boyle said.
I've started the stock with a 0.75% exposure at $34.30. Any move over recent highs in the $36s would be very encouraging, and obviously the stock has not broken the 50 day moving average in 2010. That said, there are multiple gaps in the chart from this huge run since early 2009 - they need not fill on an individual chart like they do in the indexes, but something to be aware of.

Long Valassis Communications in fund; no personal position


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