ACCO Investors Shouldn't Worry Over Temporary Events

Aug.22.14 | About: ACCO Brands (ACCO)


ACCO’s last quarter reported its top line falling and net income rising due to cost reduction initiatives.

Despite the current poor performance, the company is seeing a favourable trend in the domestic and international sub segments.

Cost cutting measures and improving markets complement the fundamentals which suggest a buy rating for ACCO.

ACCO Brands Corporation's (NYSE:ACCO) share price has increased by 324 bps in one year. The increment was small, especially considering the size of the company. ACCO is one of the world's largest suppliers of branded office products. Every company has its ups and downs and ACCO currently seems to be struggling to maintain its top line figure. This could be seen in the latest quarterly announcement of operational results the company made.

In this article, I will briefly go through the announcement and extract the meaningful details that will complement my discussion of the future return potential ACCO has to offer.

Second Quarter

During the period, sales for ACCO declined by 3% to $427.7 million compared to the same quarter last year. The management couldn't blame poor currency fluctuation since revenues fell on a constant currency basis as well. For the domestic market, sales decreased 1% largely due to currency. On a constant currency basis, sales were flat as the market share gain and price increases were offset by sales decline due to a large customer that recently merged.

Poor performance in Europe also caused a decline in international revenue, which fell 4%. Lastly, lower tablet sales affected the computer segment whose sales declined by 12%. There wasn't a single segment or market in which ACCO improved. The company designs and markets products in more than 100 countries around the world but the net impact still wasn't positive.

Moving south, the gross margin also shrunk by 60 bps to 30.5%. Poor product mix and obsolete inventory contributed the most towards this decline. Had there not been cost controls and lower inflation this margin would've fallen an extra 150 bps. These cost saving initiatives are presently being enacted by ACCO in order to accommodate investors. Since the top line isn't growing there is no other source to increase earnings.

These savings helped to shrink selling, general, and administrative expense as well. The net result was net income of 18 cents per share compared to the 8 cents reported in the previous year. However, the income included elements of debt refinancing, restructuring, and IT integration costs. Adjusted income increased by 4% to 19 cents per share. The improvement was the result of lower operating and interest expenses brought by internal cost savings.

While the present result wasn't that significant the company's future should improve. This is because the back-to-school category in North America is showing positive improvements with significant momentum in placements particularly in the mass channel. Acting promptly, ACCO has broadened its product variety to react to consumer preference for lower-priced items.

The company is also monetizing its US-based manufacturing facility by marketing many of its products as being American made. Secondly, ACCO is shifting from office superstores to mass channels in retail and is closing stores across the office superstore channel. These moves are designed to better structure the business to reap gains in the slow-moving industry.

The international arena should benefit during the second half of the year because the back-to-school season, especially in Brazil, impacts the period. For the computer segment, the exit from low-margin and commodity categories such as smartphone cases should help the company to improve profits instead of relying solely on those coming from bottom-line initiatives. Also, ACCO is gaining from its Mead and Trapper Keeper brands to create tablet cases reminiscent of iconic designs from the '80s. As a result, the company says that it is seeing sales increases in the PC and laptop categories.

Though it's still early to give concluding remarks, the future appears optimistic for ACCO. Investors can see the upside potential through the fundamentals. ACCO presently holds a price to earnings ratio of 9 compared to the industry's 20. Similar metrics like price to sales and price to cash flow are also below its peers' levels implying the undervalued status of the company.

Also, at its three year average ACCO's top line has still been better than its peers who have collectively experienced a negative 2.3% growth rate in sales. On the other hand ACCO has experienced a 1% increase in sales. Return on equity was also positive at 13.3%, which is nearly 5% higher than its peers' reported figures. The only drawback ACCO has is its high debt level.

Nonetheless, if the macro environment continues to improve ACCO will be posting revenue growth soon. Costs saved will also improve the bottom line. Therefore, the company's investors should have faith in ACCO's future. For potential long-term investors, I suggest buying the stock with the understanding that there are inherent risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.