American Reprographics (NYSE:ARP) is the undisputed leader in the $5bn reprographics industry. Reprographics services typically encompass the digital management and reproduction of construction documents or other graphics-related material and the corresponding finishing and distribution services. The business-to-business services ARP provides to its customers includes document management, document distribution and logistics, print-on-demand, and a combination of these services in its customers’ offices as on-site services, often referred to as “facilities management.”
The company serves 73,000 active clients through a network of 230 branches and 3,015 facilities management contracts with a total staff of 4,500. ARP generates 65% of its revenue from the non-residential construction sector with the balance coming from residential construction (15%) and general commercial printing (20%). The Company’s flagship PlanWell software that allows for the creation of online planrooms is well positioned to become the industry standard for managing and procuring reprographics services within the AEC industry. American Reprographics, whose headquarters is in Glendale, California, generates just under half of its revenue within its home state.
According to the International Reprographics Association, or IRgA, and other industry sources, the reprographics industry in the United States is estimated to be approximately $4.5 billion in size. The IRgA indicates that the reprographics industry is highly fragmented, consisting of approximately 3,000 firms with average annual sales of approximately $1.5 million and 20 to 25 employees. Since construction documents are the primary medium of communication for the AEC industry, demand for reprographics services in the AEC market is closely tied to the level of activity in the construction industry, which in turn is driven by macroeconomic trends such as GDP growth, interest rates, job creation, office vacancy rates, and tax revenues. According to FMI Corporation, or FMI, a consulting firm to the construction industry, construction industry spending in the United States for 2006 was estimated at $1.2 trillion, with expenditures divided between residential construction 53.1% and commercial and public, or non-residential, construction 46.9%. The $4.5 billion reprographics industry is approximately 0.4% of the $1.2 trillion construction industry in the United States.
ARP’s AEC revenues are most closely correlated to the nonresidential sectors of the construction industry, which are the largest users of reprographics services.According to FMI, the non-residential sectors of the construction industry are projected to grow at an average of 8.3% per year over the next three years.
Market opportunities for business-to-business document management services are rapidly expanding into non-AEC industries. For example, non-AEC customers are increasingly using large and small format color imaging for point-of-purchase displays, digital publishing, presentation materials, educational materials and marketing materials as these services have become more efficient and available on a short-run, on-demand basis through digital technology. As a result, ARP’s addressable market is substantially larger than the core AEC reprographics market.
ARP has a heavy emphasis on the non-residential construction market and is benefiting from increasing industry volumes. Total market size of $5 billion is split among several thousand competitors, mostly small, single location players with $1-$2 million in annual revenue. ARP is by far the undisputed leader in the space with revenues nearly 6x those of its largest competitor and an unmatched national presence. ARP’s industry leading technology, PlanWell, is an online system for managing and procuring reprographics. This system is used at all of the company’s 230 branch locations and is also licensed to independent reprographers. ARP has established a solid track record of generating high single / low double digit organic growth and completing selective acquisitions; this strategy is targeted to yield sustained, long term earnings growth of at least 15%. The sector is undergoing a transition to digital services with an increase in on-site facilities management contracts at customer locations; both these changes are accretive to margins. ARP, this year, has outlined an overseas expansion plan to tap into the growth in commercial construction in both Europe and Asia. Acquisitions are an integral part of the Company’s strategy. Currently California contributes over 40% of ARP's total revenues. Management has clearly outlined its intent to diversify its geographic mix and is very opportunistic as its scouts the landscape for acquisition targets. During the year ended December 31, 2006, the Company acquired 16 reprographics companies of which 13 were in the United States and three were in Canada. Very strong and highly respected management team that has been able to successful acquire and integrate acquisitions as part of growth strategy. ARP went public on Feb 4, 2005 at an IPO price of $13 per share. Since then the Company is currently trading at $29.62 representing a 2.3x return over that period.
Key Financial Highlights
ARP has gone revenues from $444 million in 2004 to $592 million in 2006, representing a 15% CAGR over that period. Consensus estimates call for 2007 revenues of $698 million representing 18% growth over 2006. EBITDA has grown from $90 million to $143 million over that period representing a CAGR of 26%. EBITDA is expected to grow 34% to $180 million. EBITDA margins have expanded from 20.4% in 2004 to 24.0% at the end of 2006 demonstrating the operating leverage in the business model. Management is targeting a 100 basis points increase in EBITDA margins for 2007. As of the March qaurter, EBITDA margins stood at 25.1% The Company has demonstrated very strong free cash flow conversion with over 65% of EBITDA converting into free cash; ARP trades today at an attractive 6.5% LTM FCF yield. On a 2007 basis, ARP trades at a very attractive FCF yield of over 7.5% Negligible capex requirements with capital expenditures representing around 1.2% of sales. The Company has an underleveraged Balance sheet with debt outstanding at 1.9x LTM EBITDA; nearly 40% ROE. Significant insider ownership with management owning around 22% of the shares outstanding on a fully diluted basis.
Key Trading Highlights
Market Cap as of 5/19/07 stood at 1.3bn; Current stock price is at $29.62 The stock has traded in a 52 week range between $28.38 - $38.59 The stock is currently trading at an attractive 10.7x LTM EBITDA multiple. On a 2007 multiple, the stock current trades at 9.0x Consensus EBITDA and 18.4x consensus GAAP Earnings
The obvious negative to the Company is that it is tied to a cyclical sector – i.e., Commercial Construction. However to the Company’s credit, during the previous 2001-2003 downturn, ARP was able to preserve margins while revenues remained flat. The Company’s overseas expansion strategy should be able to smooth out some of that volatility and add a more secular theme to the story.
Continued top line growth with organic growth levels returning to 7-8% range Ability to continue to target accretive acquisitions Significant free cash flow generation raises the possibility of future buybacks Attractive take-over target for both strategic (Iron Mountain, Pitney Bowes) investors and financial sponsors
ARP 1-yr chart