Is ARC a great deal at $4.00 per share?

If you’re an older person (and I am an older person), you’ll probably recall the old EF Hutton advertisement that said, “when EF Hutton talks, people listen!” Well, I, too, have a saying (this saying is related to my stock-picking prowess)….. “when Joel buys, sell.” Case in point: the other day, I decided to buy a stock that’s fallen quite a lot over the past two years, a stock that’s fallen a bunch in just the past six months. Just prior to executing my “buy” transaction, I e-mailed a friend to tell him what I was going to buy, suggesting to him, in light of my saying “when Joel buys, sell,” that he should considering “shorting” the stock I’m about to buy. (This, because whenever I buy a stock, it goes down …. and, if I’m not going to make money, at least one of my friends should.) Well, I did buy the stock, and, guess what, the stock did go down. Well, at least my track record is intact!

Which brings me to the subject of ARC’s stock price. The big question is, “is ARC’s stock (symbol ARP on the NYSE) a good buy at $4.00 per share?” Well, I think it is a tremendous value at that price. And, if ARC’s stock falls even more, it will be more than a tremendous value ….. it’ll be a steal. But, what do I know, anyway? At this point in my life, I have a very long-term investment horizon for stocks I own, since I’m not planning to (and don’t think I’ll have the need to) cash in my stock portfolio for approximately ten years.

For those of you who’ve been active in acquiring, merging or selling reprographics companies over the years, you’ll find these financial measures interesting:

At a price of $4.00 per share, ARC’s market-cap (market valuation, which is computed by multiplying the number of shares outstanding by ARC’s price per share) is around $183 mil. Theoretically speaking, if one had $183 mil, one could buy 100% ownership of ARC.

At a price of $4.00 per share, ARC is now valued (based on its market cap) at 35% below “book value”. [Book value is “stockholders’ equity. ARC just wrote off approximately $35 million in Goodwill (Goodwill “impairment” charge), which substantially reduced ARC’s book value.] [Okay, for all you naysayers out there, there are some who would discount Goodwill as a component of book value; but, I don’t; ARC’s roll-up strategy has been based on leverage, goodwill, and earnings power.]

At a price of $4.00 per share, ARC is now valued (based on its market cap) at 26% of Sales Revenues (2008 Sales Revenues). If ARC’s 2009 Sales fall to $600 mil (and, I’m not saying or implying that ARC’s Sales will fall to that level for 2009, I’m simply using that number as an example), then, at price of $4.00 per share, ARC would be valued at 30% of Sales Revenues.

Earlier in my career in the reprographics business, my company was active in acquisitions and mergers. Although my exposure to this sort of activity is rather ancient at this point, I do have a few comments I’d like to share with you about valuations of reprographics businesses, at least from a historical perspective:

(1) In the past, it would be highly unusual, if not extraordinary, for anyone to be able to buy a profitable reprographics company for less than book value. At the price of $4.00 per share, one can now buy the industry leader (ARC) at a hefty discount below book value.

(2) In the past, one could buy profitable reprographics companies for 50-75% of annual Sales Revenues, sometimes even less. (Well, that’s changed a lot over the years, companies who acquire now being much more focused on EBITDA and EBIT multiples rather than focused on % of Sales or book value. In considering acquisition opportunities years ago, we looked at a variety of financial measures; earnings multiples, book value, Sales, EBIT, EBITDA, pricing, margin, etc.) At the price of $4.00 per share, one can now buy the industry leader (ARC) at 26% of Sales Revenues.

(3) If I’m recalling this correctly, ARC’s been paying [according to press releases, SEC fillings (including exhibits) and investor presentations] acquisition purchase prices that range from 4.0 x EBITDA (some may have been lower) to 6.0 x EBITDA (some may have been higher.) Yet, right now, at $4.00 per share, ARC, itself is valued at less than 1.4 x EBITDA. (Hey, someone out there, how about checking that math - - is ARC, at $4, valued at 1.4 x EBITDA?)

There are two ways to make money in the reprographics business. You can make money from your own business. And, if you buy stock in a publicly-traded business in the industry and that company’s stock goes up, you can make money that way as well. Does owning stock in a competitor mean that you’re helping your competition? Well, the only answer I think pertinent is, “who the hell cares.” If a stock is now undervalued and poised, at some point, to go much higher, then someone’s going to benefit from that …. why should I forgo that potential, just because the company is a competitor?

Full disclosure: I do own ARC stock and I am planning to buy more. As I mentioned in my background information (in an earlier post), I’ve been very fortunate to have been able to cash-out of two different reprographics companies. The way I look at it is, if I buy a lot of ARC stock now and it goes up substantially over the next 5-10 years, that would be a “third” cash-out for me. (And, now that I’ve said that, remember that I said, “when Joel buys, sell.”)

Finally, a friend of mine in the reprographics industry recently posed this question …. “given ARC’s performance of late (he was referring to ARC’s stock price), do you think that ARC will consider going private?” Well, my take on that (whether ARC will remain a publicly-traded company or go private) is, “who the hell knows.” Certainly, it’s got to be very frustrating to watch your company’s value (market-cap) fall from $1.7 billion to $182 mil. And, it is very expensive to be a publicly-traded company, considering all of the expenses that go with that, not to mention the time and effort it takes to work with and respond to annoying, aggravating questions from analysts and large investors. Another friend asked me about Fedex; “would Fedex be a likely candidate to acquire ARC?” Well, another “who the hell knows” answer from me. Fedex acquired Kinko’s for $2.3 billion (was that the number?) and then proceeded to discontinue one of the most well known brands in America (a move that I personally think was dumb, but what do I know, anyway) …. and I’ve yet to hear anyone say that Fedex knows how to grow that business. And, if Fedex hasn’t yet figured out how to profitably grow Kinko’s (now Fedex Office), what success would Fedex have with ARC?

Okay, that was a very long-winded post. (If you think my posts are long, you should have seen my proposals!)