Stadium Capital continues building its position in American Reprographics Co (ARC) shares (information updated for purchases through 9/30/2011)

Since August 23, 2011, which was when Stadium Capital first filed SEC Forms 3 and 4 to indicate it had become a 10% or more holder of ARC shares, Stadium Capital has purchased, through September 30, 2011, an additional 478,380 shares, bringing its total share ownership to 5,124,701 shares, which figure represents approximately 11.09% of ARC’s total outstanding shares. Stadium Capital paid $1,750,450.00 for these additional shares. Stadium Capital’s average cost per share, for ARC shares purchased from August 23^rd through September 30^th, works out to $3.66 per share. The closing price of ARC shares on September 30, 2011 was $3.36 per share.

Recent Form 4 filings with the SEC reveal these purchases – from August 23^rd, 2011 through September 30, 2011.

Transaction Date	Purchase Price	# of Shares Purchased	# of shares owned, after purchase	%age of O/S Stock Owned
8/23/11	$3.79	30,600	4,676,921	10.12%
8/24/11	$3.88	17,991	4,694,912	10.16%
8/25/11	$3.80	244,000	4,938,912	10.69%
9/2/11	$3.54	29,315	4,968,227	10.75%
9/6/11	$3.45	1,833	4,970,060	10.75%
9/8/11	$3.57	6,591	4,976,651	10.77%
9/9/11	$3.49	11,641	4,988,292	10.79%
9/12/11	$3.54	17,256	5,005,548	10.83%
9/20/11	$3.56	13,737	5,019,285	10.86%
9/21/11	$3.50	9,170	5,028,455	10.88%
9/26/11	$3.47	5,500	5,033,955	10.89%
9/28/11	$3.33	27,524	5,061,479	10.95%
9/29/11	$3.29	22,203	5,083,682	11.00%
9/30/11	$3.35	41,019	5,124,701	11.09%

While I was in Europe, I received an e-mail from an investor type person, who indicated that he had found Reprographics 101, that he had read several of the articles on Reprographics 101, and to inquire if I would be available to talk to him on the phone about the reprographics business and industry. After I returned home from Europe, which was earlier this week, we chatted on the phone for about one hour. He explained that he looks for investment opportunities in “turnaround” situations, further explaining that it is not uncommon for a stock to get beaten up, when its industry is experiencing a down-cycle (a “cyclical problem” – due to a recession, or whatever you choose to call it), to the point where the stock can be purchased at a substantial discount to its underlying, real value. From that perspective, you buy a bunch of the stock, and, then, hold onto it until the down-cycle reverses and becomes an up-cycle. When the up-cycle occurs, the company’s numbers, in this case ARC’s P&L numbers, will recover. Again, that considers that the current problem (the reason why the stock price fell so dramatically from where it had once been) was/is caused by a “cyclical” problem. We all know that the A/E/C Industry is well off where it was back in 2006/2007. And, all of us also know that the A/E/C industry will, at some point, recover – and, in my opinion, once that recovery starts, it will end up being a very robust recovery. When will that happen? I’m not smart enough to predict that.

I previously reported, in a post on Reprographics 101, that Stadium Capital has also amassed a significant position in “Builders FirstSource.” (NASDAQ: BLDR). You can see Stadium Capital’s significant position at this Internet-address:

http://moneycentral.msn.com/ownership?Symbol=BLDR

Here’s a brief description of Builders First Source’s business, courtesy of Google Finance:

Builders FirstSource, Inc. is a supplier and manufacturer of structural and related building products for residential new construction. The Company has operations principally in the southern and eastern United States with 52 distribution centers and 47 manufacturing facilities, many of which are located on the same premises as its distribution centers. It offers an integrated solution to its customers providing manufacturing, supply, and installation of a range of structural and related building products. It distributes a range of building products and services directly to homebuilder customers. In addition, it manufactures floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. In addition to its range of construction services, it provides an offering of products that includes approximately 62,000 stock keeping units (SKUs). It serves a customer base ranging from production homebuilders to small custom homebuilders.

Well, as you can see from that “business description”, Builders FirstSource’s business is very heavily tied to the residential construction industry. So, it is not surprising that Builders FirstSource’s revenues in 2010 were less than half of what they were in 2007. BLDR’s stock price was up around $18.00 in February 2007. On September 30, 2011, BLDR’s stock price was $1.27 per share. My guess is that Stadium Capital has amassed its significant position in BLDR’s stock in the hopes that BLDR’s revenues, profits and stock price will rebound, at some point in time after the residential construction industry has begun its recovery. So, a “cyclical” play, if you will.

That’s why I think that Stadium Capital’s significant investment in ARC is a similar, cyclical play.

Back to the investor guy’s commentary and questions, when we spoke on the phone. He talked about “cyclical” and “secular” issues/problems. Prior to getting on the phone with me, he talked to people who work for construction companies, people who work for Architecture firms and to a few reprographers. From the research he did, he is aware that the A/E/C reprographics industry is dealing with a significant “cyclical” problem/issue. But, beyond that, he is also aware that the industry is going through change, change that represents a “secular” problem/issue. As I’ve previously pointed out in numerous posts on Reprographics 101, the greatest forward challenge reprographers face is not the cyclicality of the A/E/C industry. The greatest forward challenge reprographers face is, “when the A/E/C Industry rebound finally surfaces, will A/E/C customers resume printing (in terms of quantities of printed plans and specs on a “per project” basis) as much as they did before the Great Recession started? That’s a very large “looming” question, one that I’m not smart enough to answer.

In previous post on Reprographics 101, I said this:

On 8/5/11, RW Baird & Co issued its updated report on ARC. In that report, RW Baird continues its “outperform” rating on ARC stock, but lowered its “price target” from $12.00 to $9.00. The report assigns a “suitability rating” of “higher risk.”

On September 30, 2011, an article, in which ARC was highlighted, was published on Financial News Network Online. I’m not going to reprint the complete article; I’m only going to reprint the headline of the article, the intro paragraph and the paragraph that pertained to ARC:

"Top 3 Companies in the Office Services & Supplies Industry With the Lowest EV/EBITDA Ratio (ARP, KBALB, SYKE)"

Below are the three companies in the Office Services & Supplies industry with the lowest enterprise value to EBITDA (EV/EBITDA) ratios. EV/EBITDA is an important metric used in valuing comparable companies. It is capital structure neutral and generally the lower the ratio, the more undervalued the company is believed to be.

American Reprographics (NYSE:ARP) is lowest with an EV/EBITDA ratio of 3.78. American Reprographics Company provides reprographic technology and services. The Company provides services that include scanning, imaging, and managing black and white and color documents.

Also, in more than one previous post on Reprographics 101, I’ve pointed out that ARC’s “market cap” (which stood at $155 mil at market-close on Sep 30^th) is very significantly less than the total aggregate purchase price that ARC has paid for all of the companies it has purchased.

Disclosure: I own a small position in ARC stock, which I acquired at $3.49 per share. I’ve been thinking about increasing my ARC stock position substantially, but please note that I often think about increasing and decreasing my positions in stocks, and, more often than not, simply stand pat. (I am, after all, a risk-averse investor.)

Thank you for your patience with this rather long-winded post.