It is interesting to observe the distinction in performance between different sectors and industries, and their possible correlation to broader economic activity. One of the places where I think that can be seen more easily is in evaluating large-cap versus small-cap stocks. If you look at most of the biggest and most recognizable names in the market over the past year, the general tendency in practically every sector has been to follow the the broad indices higher. If you look at the fundamentals of many of those companies, there are often clear indications that they are able to navigate the challenges and uncertainty associated with different economic cycles better than their smaller brethren. That isn’t surprising, and it is a natural reason any smart investor, myself included, focuses on many of these companies first under these kinds of market conditions.
Small-cap stocks can be harder to evaluate – not because their management teams are less capable, or exercise less financial discipline, but simply because the size, scale and breadth of their respective businesses are usually more narrowly focused. That can put those companies at greater risk to economic forces that may be entirely out of their control. The divide can become even wider if the sector or industry the company operates in also happens to lie on the wrong side of shifting economic winds.
The last two years have certainly proven that all sectors are not created equal. There are sectors that have held up extremely well even amid shutdowns, social restrictions and supply chain constraints. Many of those included 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 or limited, even as social restrictions have eased or been removed. That shift helped shield many of those companies from the worst economic impacts of the pandemic, and represented a significant shift away from traditional business operations, creating a ripple effect that impacted other businesses in a negative way.
One of the business segments that was forced to absorb a negative impact, but that should be poised to begin a gradual recovery assuming economic and work activity resumes some form of “normal,” pre-pandemic for 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. That could mean that companies like ACCO Brands Corp (ACCO) may be in a position to see its business activity finally begin to recover. Along with the shift to remote work is the complexity most states have continued to grapple with in reopening schools, as resuming regular, face-to-face schooling has been attributed to increases in infections among high school and college-age groups for much of the past year, and is another area that could act as either headwind or tailwind depending on the degree to which schools at all levels throughout the country resume their regular activities.
ACCO’s stock has followed a mostly downward trend for most of the past year, but looked like it might be ready to reverse that trend as 2022 started. The last few weeks, of course, have reintroduced uncertainty back into the economic picture on a different scope and scale, since war is one of the things that the market has historically proven to struggle with the most. That has also sent ACCO stumbling back down and looking for a new level at which to stabilize. The stock’s recent price action flies in the face of a fundamental profile that including improving profitability shown by Net Income and Free Cash Flow, and a stable dividend that offers an attractive passive income yield. Are those elements enough to make the stock a good value at the same time? Let’s find out.
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 $797.5 million.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 68.75%, while sales where almost 24% higher. In the last quarter, earnings improved by 63.64% while revenues were 8.28% higher. ACCO’s operating profile is narrow, but healthy, and is getting stronger. Over the last twelve months, Net Income was 5.03% of Revenues and strengthened to about 9.38% in the last quarter. This is a sign that the company’s profitability is improving nicely.
Free Cash Flow: ACCO’s free cash flow is healthy, at a little more than $138.4 million. This metric increased from $124 million in the quarter prior and $115.9 million three quarters ago. The current number also translates to an attractive Free Cash Flow Yield of 17.38%. It is also worth noting that ACCO’s Free Cash Flow was just $40 million in March of 2019.
Debt to Equity: ACCO has a debt/equity ratio of 1.1. That is a high number that signals the company’s heavy reliance on leverage. Their balance sheet shows $954 million in long-term debt versus just about $41.2 million in cash and liquid assets. Their Net Income and Free Cash Flow numbers indicate company should have no problem servicing the debt it has, but there is limited financial flexibility in the event their profit margins decrease.
Dividend: ACCO pays a dividend of $.30 per share, which translates to an annual yield of 3.61% at the stock’s current price. ACCO differs from many small-cap stocks in that it pays a dividend at all. I think the stability of the dividend is demonstrated by the fact the company maintained their payout throughout 2020, and have more recently increased it, indicating management’s confidence in their approach. Their dividend payout is also a little less than one-third of their annual earnings per share, which is generally pretty conservative.
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 $10.40 per share. That suggests the stock is nicely undervalued, by about 25% right now.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend over the past year to its low in December at around $7.50. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock managed to stage a short-term, upward trend until late February, when the broad market’s uncertainty and consequent momentum forced the stock to start moving back down again. Current support is around $8.20, with immediate resistance at around $8.50. A drop below $8.20 should have limited downside, with next support sitting at around $7.85 to $8 per share, while a push above $8.50 is likely to find next resistance at around $9, which is close to where the 61.8% retracement line sits. A push above that point could see the stock rally to about $9.50 before finding secondary resistance.
Near-term Keys: ACCO has a very attractive value proposition, and some intriguing fundamental strengths that may make it a tempting target for a long-term opportunity. If you prefer to work with short-term strategies, there could be an interesting short-term opportunity to buy the stock or work with call options if the stock breaks above $8.50, with a bullish profit target at around $9 to $9.50 per share if buying activity increases. The narrow distance between current to next support implies a bearish trade, either by shorting the stock or buying put options is a low-probability trade right now.