Desjardins: High Multiple Should Lead Shares Lower

After reading Desjardins Securities analyst Carl Bayard’s note Wednesday on Quebecor World Inc. (IQW), investors in the commercial printing giant might just feel like giving their wrists a big paper cut.

Despite news from the company when it released earnings Tuesday that its retooling program will end earlier than expected, by summer, and some promising indicators, the situation looks bleak to Mr. Bayard.

He reiterated his “sell-above average risk” rating and US$11 stock price target. The stock closed Tuesday at US$13.05. “We see no change in the company’s story,” he said in a note.

According to U.S. government statistics, the commercial print value of shipments is up 5% year over year, and industry capacity utilization is up to 82%, from a bottom of 71.7% in 2001.

But that misses the point that the printing industry is in a “secular” decline, as more traffic moves online and volumes decline. That means efforts by Quebecor World and its peers to cut costs and improve efficiency are being overtaken by falling prices.

Perhaps most sobering, Mr. Bayard quotes Warren Buffett, who once said of the dying U.S. textile industry: “Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational.” That dynamic is also underway in printing, Mr. Bayard said.

He said Quebecor World appears to have taken on less profitable contracts lately, and that the stock has become overvalued due to a spate of recent takeovers in the industry.

But despite calls for the company to be sold, he doubts that will happen, as Montreal’s Peladeau family, through conglomerate Quebecor Inc., maintains tight control over the company – but also because other large printers have been able to consolidate around it by buying printers “in highly specialized niches that have little to do with commodity long-run printing” – Quebecor Wold’s specialty.

Plus, all those efficiencies from the retooling are already priced into the stock, he added.

The good news, if you own Quebecor Inc. stock, is that more people are continuing to sign up for Quebec cable company Videotron’s digital cable, Internet and online telephone service. And given the growth there, it’s hard to imagine the Peladeaus will stay committed to owning an underwhelming printing company forever.

Despite the gloom, however, Mr. Bayard isn’t declaring the company on life support: he forecasts net profit of US$110-million this year, rising to US$156-million in 2008, up from US$84-million last year. But the multiple on the company is higher than it should be, leading to his expectation that the shares will fall in value.