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Re Value Idea Contest Submission - Quadracci
Posted by: varunfriend (IP Logged)
Date: November 7, 2013 03:36PM

I agree.
I added to my position after the drop today ... doesnt seem like anything has changed. Original thesis is still valid and certainly not worth a 25% drop in price in a 2 days.


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Re Value Idea Contest Submission - Quadracci
Posted by: swnyc2 (IP Logged)
Date: November 7, 2013 08:00PM

Ditto. I substantially added to my position today as well.

Although it should be noted that one of the directors (Betty Ewens Quadracci) sold $9.2M worth of stock a few weeks ago at $32/share. It represented about a quarter of her holdings.....


Stocks Discussed: QUAD, RRD,
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Re Value Idea Contest Submission - Quadracci
Posted by: chaoranhu (IP Logged)
Date: January 1, 2014 08:12PM

Thanks for sharing your thoughts on QUAD. They are great! Although I missed on your first post, I did add some after the recent drop. Depending on how you look at things, QUAD has anywhere from 4 to 6 dollars a share in current owner earnings. At the current price, that's 15 - 20+% in earnings yield. Being cheap is the main attraction. The downside is they are in a fragmented industry with over capacity and likely faces irrational competition often times. While interests of the board, management, and employees seem to line up well with outside shareholders, it's not as clear how well the management does capital allocation. With the business generating significant free cash flows, while it's prudent to pair down debt and pension liabilities, it seems they should also buy back shares. At the current price level, buying back shares is a much better use of cash than paying dividends. They have authorized a small $100mm buybacks, but have executed only a miniscule of that, even while their shares continue to trade at such depressed levels.Being a novice in accounting, I do have a question for you regarding maintenance CAPEX. In their 10-k, they state the following on page 77:"Property, plant and equipment—Property, plant and equipment are recorded at cost, and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. Major improvements that extend the useful lives of existing assets are capitalized and charged to the asset accounts. Repairs and maintenance, which do not significantly improve or extend the useful lives of the respective assets, are expensed as incurred. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset."They seem to imply that the amount marked as PPE purchases in their cash flow statement is more geared toward growth, since repairs and maintenance expenditures are expensed. We certainly don't have to take all that at face value. My question is, however, which item in their income statement accounts for maintenance CAPEX. I would appreciate it if you could help me understand that.


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Re Value Idea Contest Submission - Quadracci
Posted by: batbeer2 (IP Logged)
Date: March 9, 2014 03:44AM

Hi Chaoranhu,

Sorry for the slow response. I just saw your question.

>> My question is, however, which item in their income statement accounts for maintenance CAPEX. I would appreciate it if you could help me understand that.

By no stretch of imagination am I an expert (or even very knowledgeable) in the field accounting. My best but incomplete answer to your question comes in two parts:

1) By definition, no item on the income statement accounts for maintenance (or for that matter growth) capex.

Capex is not reflected in the income statement because it's added to the balance sheet as PP&E (it's capitalized) and then that PP&E is depreciated over a number of years. It's these depreciation charges that are refleced on the income statement. If you buy a machine for $10m in year one and you capitalize that, then you will never find that $10m expense on the income statement. You'll find a recurring depreciation charge though (say $1m for 10 years).

Back to your question....

2) Without much knowledge of the printing business and how they tend to account for stuff, I would expect the maintenance expenses you're looking for to be in "operating expense". Maybe they stuff some of it into COGS.

If you replace the ink (cartridge) in the printer at you office and the new cartridge somehow improves the quailty of your printouts, what would you call that? It's probably an operating expense. However, if you happen to be in the business of selling those prints, that same expense could be accounted for as COGS.

But to be sure, no honest bookkeeper would agree to it being called Capex.

As for your assumption that QUAD's capex must be biassed towards growth because QUAD directly expenses some of its maintenance.....

I don't agree.

You can install an aircon in your shop and you could call that an improvement. You could capitalize that on the balance sheet and subsequently depreciate that over many years. But if all you competitiors are doing it, that aircon is not going to bring in more customers to your shop. It is not an investment for growth. QUAD can and probably does do that but it is a matter of opinion whether it's an investment for growth. I'd say no. At the end of the day its a matter of judgement. There are no rules for that. One company's aircon may be maintenance while at another company it is an investment for growth. Some may capitalize the machine and others won't. For those that don't, one could say they have a policy of depreciating their aircons within one year. In other words, the bookkeper values it at zero before it hits the balance sheet so it has been expensed.

What I can tell you for sure is that QUAD spends more on Capex than their competitors (Capex as a percentage of PP&E is higher). That to me is an indication that at least some of that capex is growth which implies FCF understates owner earnings. Alternatively, one could argue PP&E understates economic value. Either way, it's a good thing.

Hope any of this makes sense to you.



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Re Value Idea Contest Submission - Quadracci
Posted by: batbeer2 (IP Logged)
Date: April 8, 2014 11:03AM

FWIW, I did a new estimate of the owner earnings of Quadracci based on the 2013 10k.

On page 75 it shows the company paid $55m in dividends and spent $292m on the acquisition of Vertis. Meanwhile they spent even more on Capex than they did the previous year.

They repaid a bit of long-term debt but borrowed a bit more from the bank (revolving facility). Net-net it cancels out. They didn't take on extra debt for the acquisition or the dividend.

On the pension side (page 111) the employer contributions to the fund almost matched the benefits paid and the return on the assets of the fund caused a big improvement of the funded status.

In short, my estimate of owner earnings for the year is roughly $350m (292+55).

That's $7 per share.

In this case, FCF as reported is a reasonable proxy for owner earnings.



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