The Long Case for Acco Brands

Sep.27.06 | About: ACCO Brands (ACCO)

It's a great time to revisit Acco Brands (NYSE:ABD). Acco manufactures and distributes office supplies, such as Swingline staplers and others. Most importantly, they are a bargain and are just past their one year spin-off anniversary (spun from Fortune Brands, August 15, 2005).

Right when they were spun-off the co merged with General Binding, a company in the same space. Acco management has a very good track record of cutting costs, and they are targeting a 12% operating margin on their $2 billion in sales.

The company has a fair amount of debt, with net debt at $830 million. However, they are by no means highly leveraged, and should be able to get down to an optimal debt level in the next two years. Management has been consistently cutting debt since the spin.

So we have some very key drivers here:

1) A spin-off with lots of room to cut costs given the merger between overlapping businesses. Acco has announced more than a dozen facility closures and consolidation of distribution and other cost reductions. The present management team was successful in boosting operating margins significantly while Acco was a part of Fortune brands.

2) Modestly high debt, which they are reducing quickly (down $80 mill YTD through 2Q06). Their debt is presently costing them 7% on average. It appears that the co might have been repurchasing their highest cost 7.625% notes due 2015 recently, based on unusual trade activity.

3) Pro forma sales of $2 billion, with an operating margin of 12%, would translate into operating income of $4.45 per share, and net of around $2.20, assuming modest debt reduction. Operating margins could end up being higher given the increased economies of scale of adding GBC. Comparisons should be quite favorable going forward, so Acco is a value situation with the added kicker of near term momentum.

4) A slowly growing, stable business with strong cash flows and low capex. Free cash flow is strong and growing.

Disclosure: Author is long ABD

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