Although often considered a mundane and outdated business practice, the fact is that there is a large and growing demand for printing. Consumers and businesses sometimes need a service so specialized that it can more sensible, financially, to outsource their printing work. And a company that is here to meet that need is ARC Document Solutions (NYSE: ARC). Although the financial performance seen recently has shown some improvements for the company, the last few years have been characterized by declining revenues and cash flow. In the long run, this creates some risk for investors, although this risk needs to be put into context and should take into account recent upside and long-term catalysts. Additionally, when you take into account that the company’s stock is cheap, it seems likely that some upside is warranted.
A digital printing expert
ARC Document Solutions’ management team describes the company, first and foremost, as a digital printing company. to be more specific, the company will print documents of any size or color on materials ranging from plain paper to vinyl to fabric and more. It will also print fabric, metal, wood, and even three-dimensional substrates. From time to time, the company produces high-page materials, such as manuals or catalogs. But most of its digital printing focuses on a low volume of high-quality content that the company can quickly get to its customers. It also offers other services related to printing. Its managed print services focus on acquiring digital printing equipment and placing it in its customers’ facilities for their own use based on service level agreements. Through its network, the company provides these operations in more than 10,800 locations. This line of business includes software that helps customers control their printing expenses and connect their customers’ remote employees to their offices and to ARC’s own nationwide print centers.
Another service offered by the company is called scanning and digital imaging. In short, the company digitizes small or large format paper documents, usually saving them in PDF format for their customers. the company is also able to handle sensitive documents in a HIPAA-compliant manner. Through this suite of offerings, the company also provides its customers with cloud-based document management software and other digital hosting services. Finally, the company also sells equipment and supplies to some of its customers. Services under this umbrella include equipment maintenance.
Over the past few years, ARC Document Solutions’ financial situation has not been excellent. After seeing revenues drop from $394.6 million in 2017 to $400.8 million in 2018, they began a steady decline. In 2019, it fell to $382.4 million. In 2020, it fell again, plunging to $289.5 million as a result of the COVID-19 pandemic. There may have been hope for a recovery in 2021, but that turned out to be unsuccessful. That year, sales fell further to $272.2 million. It should be mentioned, however, that the decline in 2021 was entirely due to the weak results of the first quarter of the year. For the rest of the year, sales were stronger than a year earlier. Last quarter, for example, revenue totaled $69.2 million. That was 7.6% above the $64.3 million seen a year earlier.
The company’s bottom line has looked quite mixed in recent years. Net income, for starters, has been all over the map. The worst year was 2017, when the company generated a loss of $21.5 million. In 2020, net profits of $6.2 million eclipsed the $3 million made a year earlier. And in 2021, net income increased further to $9.1 million. A better measure of business profitability would probably be cash flow. But in this case, we see some weakening over time. After hitting $55 million in 2018, it fell to $35.8 million in 2021. If we adjust for changes in working capital, the picture becomes much clearer. From 2017 to 2021, the metric dropped year over year, from $49.1 million to $39.1 million. Another metric that followed a very similar trajectory was EBITDA. It eventually went from $54 million to $41.7 million over that same period.
The good news for investors is that we are starting to see some sort of recovery. Not only did the company see positive revenue growth for most of 2021, but it also saw an increase in sales in early 2022. During the first quarter of this year, the company generated sales of $69.5 million. That’s up from $61.7 million seen a year earlier. Net profits increased from $0.8 million to $2 million. Operating cash flow deteriorated from $5.4 million to $2.9 million. But if we adjust for changes in working capital, it would have gone from $7.9 million to $8.5 million. Meanwhile, the company’s EBITDA also increased from $8.8 million to $9.1 million.
Overall, the digital printing services industry is expected to continue to grow. According to one source, the global market for it was worth $24.8 billion in 2021. This is expected to continue growing at an annualized rate of 6.7%, eventually reaching $34.3 billion in 2026. Investors concerned about ARC Document Solutions’ potential return to a downturn given historical performance should pay attention to a very close metric. This would be the number of managed print service locations the company has. I think as long as that number continues to grow, the company will eventually set itself up for long-term growth as well. In 2017, the number of locations was just 9,400. That number grew every year, including during the pandemic, eventually reaching the 10,800 we have today. Admittedly, growth has slowed, with the company only adding 30 locations from 2020 to 2021 and only adding 20 locations in the last quarter. But any sort of increase should be an indication of the long-term potential for the company.
On top of that, there’s the undeniable fact that the company’s stock looks incredibly cheap right now. Based on our 2021 results, the company is trading at a price to adjusted operating cash flow multiple of 3.4. Using the EV to EBITDA approach, the multiple is only 3.9. If the company returns to the kind of performance it achieved in 2019, those multiples would be even lower at 3.1 and 3.3, respectively. To put that into perspective, I decided to compare the company to five other similar companies. However, I must say that none of these elements are perfectly comparable. Of the five, four had positive results. Using the price/operating cash flow approach, these companies ranged from a low of 3.5 to a high of 23.6. Using the EV to EBITDA approach, the range was 4.6 to 31.8. In both cases, ARC Document Solutions was the least expensive of the bunch.
|Company||Price/Operating Cash Flow||EV/EBITDA|
|ARC Document Solutions||3.4||3.9|
|Atento SA (ATTO)||12.5||8.6|
|Virco Manufacturing (VIRC)||3.5||31.8|
|American Rebel Holdings (AREB)||N / A||N / A|
|Kimball International (KBAL)||20.6||31.6|
|NL Industries (NL)||23.6||4.6|
Based on all the data provided, ARC Document Solutions strikes me as a fundamentally cheap company that the market has yet to recognize as a likely turnaround prospect. I don’t deny the fact that the historical performance of the company leaves a bad taste. But overall, I think the fears about the company, while not entirely unfounded, are overblown at this time.