Nothing Should Stop ACCO Brands Now

By Jonathan Moreland  JAN 17, 2013 1:45 PM

No matter what politicians do or don't do, ACCO's management should be able to make its bottom line increase in 2013.


With all of the media’s focus on tech shares and sexy social media players, it’s good to remember that it’s ok to be a little boring when putting together a solid, balanced portfolio. Patience -- instead of pouncing -- is also usually a good trait for making money long term.
Last November, my firm bet that shares of ACCO Brands (NYSE:ACCO) were washed out, and likely to show strength again over the next couple quarters as the company continues to deleverage after a recent large acquisition. The stock is already showing better price action, and we don’t expect the gains are done yet.

ACCO’s Q3 results last fall illustrated the fact that our investment thesis already seemed to be under way, but ACCO’s quick bounce off that decent quarter succumbed to the market’s general pullback at that time. Shares of this office products and supplies firm jumped 24% in the two sessions after the company released third-quarter results on October 31, 2012. Volume was significantly higher on the move as well, indicating a long-awaited bullish change of heart from investors.

We had been waiting for such a change since ACCO Brands popped up on our bullish insider trading screens way back in August 2012. Six ACCO executives purchased a total of $462,972 worth of their stock in the second half of August at an average price of $6.77. Though hardly a huge dollar value for a buying cluster with that many insiders -- and the fact that some of the buys were made in new 401K plans with unknown incentives for doing so -- we deemed the insider signal significant.

Many of the buyers were long-term insiders who had bought well previously, or were increasing their holdings significantly with their August purchases. The fact that so many executives were choosing to increase the amount of their wealth tied up in ACCO stock after the shares sank in response to the firm’s unfortunate Q2 earnings event added to the significance.

Although ACCO beat EPS expectations back in Q2, management lowered guidance in the face of weakness in Europe and elsewhere. That lowered guidance meshed with our own concerns about economic growth, and we chose to wait for a more obvious buying opportunity in ACCO’s shares.
Wait for it...

The stock did drift lower this summer, but if finally caught our attention when it popped on high volume after its Q3 earnings event on October 31. Although EPS of $0.29 merely met expectations, and revenue of $501 million actually fell a little short, investors were rightfully impressed with management’s raised guidance for both free cash flow (FCF) and subsequent debt reduction this year. FCF guidance was raised to $75 million from $50 million, and debt reduction guidance upped to $150 million from $125 million.

ACCO’s acquisition last May of MeadWestvaco's (NYSE:MWV) consumer and office products business certainly increased the company’s already high debt load further. But the 48% increase in the combined company’s Q3 sales over last year indicate an ample combined top line to work with in order to potentially increase EPS via synergistic cost cuts.

Which is just what we expect to drive these shares still higher. At this point, we view ACCO as a deleveraging play. As synergies are realized, and the firm’s already substantial cash flow increases further, the company will be able to pay down debt more aggressively thereby increasing both EPS and the valuation afforded it.

Cost cuts are part and parcel of why analysts expect ACCO’s EPS to increase from around $0.81 in 2012 to just over $1 this year on flat revenue growth. And this stock’s forward valuation of just 8 times next year’s expectations seems to indicate low downside risk for ACCO if it can continue its pace of deleveraging.

While the risk of being thrown back into recession by bickering politicians cannot be dismissed, we think the grudging economic recovery in the US can withstand some more mismanagement from Washington. More to the point, our ACCO investment thesis is one where management has relatively more control over its EPS growth prospects than other firms that would be affected by another wave of economic weakness.

ACCO’s office supplies are staples, and, in any case, revenue growth is not a factor in its present attractiveness. No matter what politicians do or don’t do, ACCO’s management should be able to make its bottom line increase in 2013 via its many synergy and cost-cutting opportunities. Any continued grudging economic growth can only be a tailwind.

While we own our share of special situations, microcaps, and biotechs, solid, lower-risk positions like ACCO tend to be those stealth, boring 20%-40% gainers that form a solid core to a balanced portfolio. And insiders are great at directing us to them, even if they also tend to be a bit early with their bullish behavior.

Editor's note: Jonathan Moreland is the founder of Insider Insights and author of "Profit From Legal Insider Trading."
No positions in stocks mentioned.