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Elise Menaker / MEDILL

R.R. Donnelley & Sons posted higher first-quarter earnings but lower sales, sending the stock down. Here, corporate headquarters in downtown Chicago.

R.R. Donnelley & Sons Co. beat analysts' estimate but stock falls

by Elise Menaker
May 02, 2012

R.R. Donnelley & Sons Co. stock dropped 7 percent after the company announced a better-than-expected earnings increase but lower sales.

The stock closed at $11.81 Wednesday, down 87 cents.

In the first quarter ended March 31, the Chicago-based commercial printer posted net earnings attributable to shareholders of $37.4 million, 21 cents per diluted share, a 10 percent increase compared with the year-ago quarter when it earned $33.9 million, or 16 cents per diluted share.

R.R. Donnelley's non-GAAP net earnings attributable to common shareholders totaled $78.8 million, or 44 cents per diluted share. Analysts’ consensus earnings estimate was 36 cents.

First quarter earnings included pre-tax charges for restructuring and impairment, a loss on debt extinguishment and acquisition-related expenses, and a $19.8 million pre-tax favorable adjustment to accounts receivable for prior periods’ over-accruals of rebates owed to certain U.S. office products customers.

“The buzz word right now on Wall Street is top-line growth,” said Edward Atorino of Benchmark Co. LLC. He added that in R.R. Donnelley's case, “Top line growth was a little anemic.”
The analyst has a buy rating on the stock and noted the company “has done a great job at managing costs.”

However, the communications provider saw net sales drop 2 percent to $2.5 billion from $2.6 billion. The company attributed the drop to volume declines in certain products, "price erosion," and unfavorable exchange rates. U.S. net sales declined 3 percent to $1.88 billion from $1.94 billion.

“The segment continues to face volume declines in books, directories, both variable and financial print as well as lower pass-through sales and continued pricing pressure across the segment while slightly offset by both volume increases in logistics and the customer rebate adjustment,” wrote analysts Daniel R. Leben and Thomas B. Jackson of Robert W. Baird & Co. Inc., which makes a market in the stock and may do investment banking business with Donnelley.

The analysts estimated the company would post 33 cents per diluted share, 11 cents lower than the adjusted EPS.

“We remain cautious given the strong headwinds facing multiple segments and an extended valuation solely supported by the dividend yield,” Leben and Jackson stated.

In a press release issued by R.R. Donnelley & Sons, President and Chief Executive Officer Thomas J. Quinlan III said, “We our pleased with our first-quarter results. The revenue trend improved from the fourth quarter of 2011, reflecting a favorable trend in customer demand and new customer wins that we added to the platform during the quarter. We expect this improved trend, in conjunction with our continuing costs management efforts, to have a positive impact going forward.”

R.R. Donnelley still expects the full year of 2012 adjusted net earnings per diluted share to be in the range of $1.84 to $1.92, which omits possible restructuring and impairment charges, acquisition-related expenses, the resolution of certain income taxes and other items not yet determined. Analysts expect R.R. Donnelley's earnings to hit $1.81 per share. In 2011, the company posted non-GAAP earnings per diluted share of $1.82.

Atorino stated, “The quarter was good from a profit point of view, not too good from a revenue point of view.”