Playing a Small Business Rebound

03/10/2010 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, says a once-struggling office supplies producer should profit greatly when small businesses get back on track.

ACCO Brands (NYSE: ABD) is one of the world’s largest producers of office supplies. Its well-known brands include Swingline staplers, Wilson Jones binders, and Day-Timers organizers, among others.

It became an independent public company when it was spun out of Fortune Brands (NYSE: FO) and merged with General Binding Corp. in 2005. The company struggled after it became independent, gradually losing market share.

The problems intensified in 2008 as customers reduced inventories in response to the recession. By late 2008, ACCO was in danger of violating its debt covenants. The stock, which had held up in the mid-$20s until late 2007, plummeted to below $2 in March 2009.

Robert Keller, a veteran of the office products industry, was brought in as chief executive officer in October 2008. He hired several other new executives, and together they have taken steps to turn the company around.

They cut head count and reduced costs by $69 million last year. They also changed the organizational structure to make it more efficient and more responsive to customers. And they accelerated the introduction of new products, which had been lagging.

During 2009, ACCO was able to refinance much of its debt. While the balance sheet is still quite leveraged, the company pushed out its debt maturities to 2015 and beyond, giving it plenty of breathing room to get back on its feet. Moreover, the company has been generating good cash flow, which should allow it to reduce debt.

ACCO still has a great business franchise. Nearly 80% of revenues come from brands that hold the number-one or number-two positions in their respective categories. The company has a diversified customer base with more than 50% of sales coming from outside the US.

Small businesses, which drive a lot of ACCO’s sales, cut back on spending very sharply in 2008 and 2009, but there is evidence that they are beginning to loosen the purse strings once again as the economy recovers.  As spending on office products picks up, the positive effect on the bottom line, with ACCO’s leaner structure, could be dramatic.

Despite the company’s strong franchise and rebound potential, the stock trades at relatively low multiples of earnings and cash flow. We’re not the only ones who like ACCO; insiders have been buying actively in recent months.

While the stock has bounced back somewhat from its lows, we believe it has a lot further to go. We recommend buying ACCO up to $12. (It closed above $8 Tuesday—Editor.)

Disclosure: Accounts managed by an affiliate of the publisher own ACCO stock and bonds.

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