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R.R. Donnelley & Sons Co. (RRD) is scheduled to release its fiscal fourth quarter 2011 results before the opening bell on Wednesday, February 22, 2012. In the run-up to the earnings release none of the analysts tracking the stock made any revision to the estimate over the last 30 days.

A Sneak Peak into the Previous Quarter

The printing major’s third quarter earnings came in line with the Zacks Consensus Estimate. The reported EPS was up 16.0% from the comparable prior-year quarter. Though the reported revenue missed the Zacks Consensus by a whisker, it increased 7.8% year over year.

Operating metrics were down due to continued pricing pressures that more than offset productivity improvements, lower variable compensation expense and higher recovery on print-related by-products. (For further details please read: R.R. Donnelley Reports In Line)

Fiscal 2011 Estimates

R.R. Donnelley expects revenue for fiscal 2011 at $10.6 billion, relatively in line with the Zacks Consensus Estimate. Management expects fiscal 2011 free cash flow in the range of $650 million to $700 million.

Non-GAAP operating margin is expected between 6.6% and 6.7% and the non-GAAP effective tax rate between 23.0% and 24.0%.

Management expects total corporate expenses to be down 16% on a year-over-year basis and to recognize a certain non-cash curtailment gain of approximately $40 million in the fourth quarter of 2011.

For the fourth quarter, the Zacks Consensus estimates R.R. Donnelley to generate revenue of $2.8 billion.

Estimate Revision Trend

None of the 3 analysts covering the stock revised the estimate in the last 30 days. Hence, the Zacks Consensus Estimate for the fourth quarter remained at 44 cents per share.

The same phenomenon was witnessed in the estimation of fiscal 2011 earnings, where none of the four analysts covering the stock made any change. Thus, the Zacks Consensus Estimate remained at $1.82 per share.

Analysts covering the stock are positive on the company because of several multi-million dollar deals that it has secured in the recent past. However, the printing industry is facing challenges in the form of continued pricing pressures and increasing threat of digital technologies that enable much easier transfer, designing, resetting and reproduction of data.

Moreover, organic growth has been next to 0 to negative, as the company has been concentrating on a large number of acquisitions such as StratusGroup, Genesis Packaging & Design Inc, LibreDigital, Sequence Personal, Helium, Inc., Journalism Online, LLC and 8touches. However, we view the acquisitions positively because they have not only expanded and enhanced Donnelley’s offerings to its current customers, but also helped it to pick up new ones.

Recommendation

R.R. Donnelley’s positive earnings surprise for the past four quarters averages at a modest 1.49% and for the current quarter we expect the company to beat the Zacks Consensus Estimate by the same magnitude.

We remain Neutral on the company over the long term (6-12 months) despite its increasing volumes and new customer wins. We believe that strong alliances and customer wins including those of AT&T Inc. (T) and Verizon Communications Inc. (VZ) and more recently Office Depot Inc. (ODP) will create value for the company over the long term.

However, we expect Donnelley to remain under pressure due to weak macroeconomic conditions prevailing in most of its current as well as prospective markets.

Moreover, higher pension expenses, continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward. Currently, Donnelley has a Zacks #4 Rank, which implies a Sell rating in the short term (1-3 months).

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Source: R.R. Donnelley Earnings Preview