Thursday, July 9, 2009

An Unusual Spurt For An Unusual Company

Deluxe Corp. is a provider of customized cheques, business forms and other printed products to small businesses and financial institutions. It's also a stock that popped up about 14% today, thanks to its earnings guidance being bumped up.

This company has an unusual set of financials. Deluxe could be described as a share-buyback enthusiast: it's whittled down its shareholders' equity through buybacks to the point where its ten-year return on equity [(sum of ten year's net income) divided by (sum of ten years' shareholders' equity)] is 566.52% I kid you not, and I checked the figure twice. The more recent figures on the bottom of Google Finance's web page for the company show mostly three-digit ROE percentages. Had this company been a little more enthusiastic, it would have pushed its ROE into meaninglessness because shareholders' equity would be negative*.

Despite those ROE figures, the stock hasn't done much. Over the course of ten years, Deluxe has dropped 64.59%. It's underperformed the averages too. The reason why is explained in its 10-year average EPS growth for continuing operations (as calculated by logarithmic regression): -1.754%. In the same timeframe, the S&P 500 managed to secure about 7% EPS growth.

So, Deluxe's leap-up after a 2Q guidance bump-up is not that much of a surprise: not much good was expected from it previously. 1Q '09 earnings were 43 cents/share; the new revised guidance estimates 54-56 cents/share. The old guidance estimated 43-51 cents/share.

Second quarter earnings for 2008 were 63 cents/share. Even if Deluxe's earning come in at the high end of the new estimate, its EPS will have dropped 11% from the same quarter a year ago. This drop would be lesser than 1Q '09's -24.1% with respect to 1Q '08, but it still would be a drop.

It should be clear from the above that I didn't feel the excitement. Deluxe's 1999-2008 average 10-year EPS, though, is $2.81. At its closing price of $14.14, it's selling at a P/10YAE of 5.03. Someone investing on this basis would, essentially, be waiting for Dover's earnings to go up above its 10-year average.

To plunge in right now, though, would be train-chasing. I've been there and done that, unfortunately for me.

Update: Deluxe's balance sheet would make a true Grahamite whip out a heap of garlic and look for a stake. Its current ratio, as of March 31st, is 0.54. Taking out its accrued expenses from its current liabilities, which is really a no-no, still leaves a current ratio of only 1.1. The company evidently relies upon standby lines of credit to keep itself chugging along, current-wise.


*: If shareholders' equity is negative, then positive earnings make for a negative ROE. A positive ROE would mean the company's losing money.

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