ACCO: do fundamentals support increasing value proposition?

One of the biggest questions value-oriented investors have to ask themselves is the reason a stock may look like a good bargain. More often than not, one of the simplest reasons is because the stock has been beaten down by the broad market. The reasons for the decline can be multitudinous, and can imply any number or combination of cyclical, economic, or fundamental pressures that prompted investors to sell their shares. Cyclical factors can be as simple as a sector or industry association with a more well-known company that becomes the subject of some kind of bad news that carries over to its industry brethren, or a general perception that a sector or industry is going to underperform.

Most cyclical factors that drive a stock to extreme lows are transitory enough that, if you can find a stock offering a useful valuation, along with a good base of fundamental strength to work with, you’ll usually be able to uncover an interesting gem of a stock to work with. It’s a bit of a contrarian mindset, because most growth-oriented investors shy away from stocks that are going down; but in the long-term, these are often the kinds of stocks that can help smart investors function successfully in any kind of market.

Economic pressures are harder to overcome, especially if those pressures have a direct impact on the sector or industry the company is tied to. While a broad economic downturn will usually affect just about every sector of the market in one way or another, some sectors may be more subject to extreme pressures than others, depending on the nature of economic shift. I think that the current economic downturn, tied to the COVID-19 pandemic, is a case in point.

The market has proven that since March, not all stocks, and even not all sectors are created equal. There are sectors that have held up extremely well even as global economic shutdowns sent workers home and closed just about every kind of traditional business activity. Those are industries, and businesses that have also seen the market recognize the difference, and push their stocks back to or near to pre-pandemic highs, or even in a few cases now, above them. Those include companies that offer services and solutions that facilitate remote organizational connectivity and collaboration, which have helped a large portion of corporate America continue to function even while normal, in-office operations haven’t been possible. That shift has helped shield many of those companies from the worst economic impacts of the pandemic, but also looks like it could translate to a long-term shift away from traditional business operations, creating a ripple effect that could impact other businesses in a negative way.

One of the business segments that has already seen a negative impact, and that could continue to be effected for an extended period of time is the Commercial Services and Supplies industry. These are businesses that provide products and services to organizations – such as businesses, schools, and governments – in traditional office settings, which means that the longer it takes America to get back to the office, the longer it will take these companies to recover. That could mean that companies like ACCO Brands Corp (ACCO) may continue to struggle the longer a complete economic recovery takes. Another factor that remains to be seen is whether the current shift for white-collar workers all over the country to work-at-home arrangements extends beyond the scope of the pandemic. Some organizations have managed to navigate the transition smoothly and effectively enough that I’ve seen an increasing number of CEO’s talking about keeping employees working from home, either on a permanent or at least modified basis even after the economy has recovered. 

ACCO’s stock has mirrored the broad market’s dip to bear market lows in March, with a sizable bounce from that point to create an interesting short-term upward trend into June that has since flattened into a narrow trading range. Despite the increase from its March low, ACCO is still well below its pre-pandemic levels, with some interesting fundamental strengths to go with its compelling value proposition. Do those strengths add up to the resources the company may need to weather a long-term decline in commercial demand? The answer to that question could define the difference between a great value opportunity and just a cheap stock.

Fundamental and Value Profile

ACCO Brands Corporation is engaged in designing, marketing and manufacturing of branded business, academic and selected consumer products. The Company operates through three segments: ACCO Brands North America, ACCO Brands International and Computer Products Group. The Company’s brands include Artline, AT-A-GLANCE, Derwent, Esselte, Five Star, GBC, Hilroy, Kensington, Leitz, Marbig, Mead, NOBO, Quartet, Rapid, Rexel, Swingline, Tilibra and Wilson Jones. The Company’s ACCO Brands North America and ACCO Brands International design, market, source, manufacture and sell traditional office products, academic supplies and calendar products. ACCO Brands North America consists of the United States and Canada, and ACCO Brands International consists of the rest of the world, primarily Northern Europe, Australia, Brazil and Mexico. Its Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers and tablets. ACCO’s current market cap is about $680.6 million.

Earnings and Sales Growth: Over the last twelve months, earnings declined nearly -67%, while sales decreased by about -29%. In the last quarter, earnings improved dramatically by almost 71.5% while revenues were 4.5% lower. ACCO’s operating profile before the pandemic set in was narrow, but generally healthy, but over the last couple of quarters has seen signs of significant deterioration. Over the last twelve months, Net Income was 4.73% of Revenues (versus 6% in the quarter prior) and narrowed to about 1.5% in the last quarter (versus 2% in the quarter prior). This is a sign that the company’s profitability is still being pressured, and could continue to be while the pandemic persists.

Free Cash Flow: ACCO’s free cash flow is very healthy, at a little more than $255.3 million; this marks an improvement from $207 million in the quarter prior. The current number also translates to a very attractive Free Cash Flow Yield of 34%. It is also worth noting that ACCO’s Free Cash Flow was just $40 million in March of 2019, with the company showing consistent improvement in this critical metric from that point. That acts as an interesting counterpoint to the company’s Net Income story.

Debt to Equity: ACCO has a debt/equity ratio of 1.48. That is a high number that signals the company’s heavy reliance on leverage. Their balance sheet shows $1.05 billion in long-term debt versus just about $128.8 million in cash and liquid assets. For now, the company should be able to service the debt it has; however continued deterioration of Net Income could make it much harder for the company to keep doing so.

Dividend: ACCO pays a dividend of $.26 per share, which translates to an annual yield of 3.71% at the stock’s current price. ACCO differs from many small-cap stocks in that it pays a dividend at all; but under the circumstances, it is uncertain how stable the dividend is.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $10.84 per share. That suggests the stock is carries a useful discount, being undervalued by about 51% right now.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The dotted, diagonal line traces the stock’s downward plunge from its high at around $11 in February to the stock’s low point, reached in mid-March at around $3.50. It also provides the baseline for the Fibonacci retracement lines superimposed over the stock’s price action from that point. The stock rallied by the end of April to the 50% retracement line at around $7.50 before dropping back again, with a second bounce in mid-May providing a new push back to the 50% retracement line that went a little above it in June. From that point, the stock has begun to hover in a narrow trading range between resistance at $7.50 and support at around $6.50. If it can push above, and stay above $7.50, it has additional short-term upside to about $8.40, where the 61.8% retracement rests, and additional room to to test its trading range through most of last year between $9 and $10 from that point. Current support is back around the 38.2% retracement line, which is right around $6.50 right now. A drop below that point could see the stock test its May and April pivot lows around $5.30, with additional room below that to fall to as low as $4.50 to $4 – right around the stock’s bear market low point.

Near-term Keys: ACCO has a very attractive value proposition, and some intriguing fundamental strengths that make it a tempting target for a long-term opportunity. I think the stock’s deteriorating Net Income and questionable liquidity are significant enough red flags, however, so that for now, the stock represents a bigger long-term risk than the opportunity it offers under broad market conditions. There could be an interesting short-term opportunity to buy the stock or work with call options if it can break above its current resistance at $7.50, with upside to $8.50 at least and possibly into the $9.55 range where its “fair value” rests right now. Watch, however for a drop below $6.50; that could be a signal to consider shorting the stock or working with put options, using a level between $4 and $4.50 as a useful profit target on a bearish trade.