Is The iPad A New Perfect Storm?

It is always a good time to update our thinking after all the excitement surrounding the annual printing exposition in Chicago each year. Much of the talk this year at Graph Expo was the “digital press explosion” and the fact that the industry has settled into a relatively good year.

Sales for the past five months have compared favorably to the same period last year. As we reach the critical 4th quarter of 2010, there is some optimism that the print channel shrinkage has stopped its double-digit decline and reached a new bottom of around $85-87 in print shipments for 2010. August commercial printing shipments were $7.3 billion, up $235 million (+3.3%) compared to 2009. Ad pages were up to 40,387, a gain of 3.6% when compared to 2009 and the second quarter in a row to record ad page growth. It is not 2006 and the industry understands that those good times will not return as they have in previous post recession upticks.

The free fall in print always leads any recession and it began in mid 2007 as the industry was posting it last big year at over $100Bn in print shipments. Reflecting on the good news in print shipment and ad pages, we see an industry trying to re-invent itself in several ways:

1. Digital presses are now bigger, faster, and produce quality closer to offset than ever before. Any printer must include new digital presses along with the less than enthusiastic replacement of “tired iron” in the sheet fed or web offset pressroom. The recent trade show, Graph Expo, did not have either Heidelberg or Komori at the show while manroland and KBA attended without any presses.
2. The consolidation of large printers (Quad acquires World Color and Donnelley acquires Bowne) reduces that landscape still further. Will some company please acquire Vertis! In the small regional print markets, the “tuck in" trend continues unabated where two printers in the same geographic area combine print volume into one operation while shuttering the unprofitable one. One estimate has the industry shrinking at about 1500 a year or close to 4000 printers exiting the market place since 2007.
3. Even with the reduction in capacity following these roll-ups, there is little to stop the continued price reductions chasing the smaller print pie as other content channels see price reductions each year in delivering content to the reader.
4. Smart printers continue to improve revenue and margins by moving deeper into the supply chain of marketing and logistics for their customers. Web-to-print models, asset management, and any number of other value added services take the printer into areas other than just ink on paper.
5. If the iPad truly sells 40,000,000 units in 2011 as recently forecasted, the impact on all print media may be truly revolutionary. While the Kindle was a simple threat to books, as the iPad evolves it may become more common than the smart phone. This new iPad technology will mirror the 1995-2000 perfect storms of Adobe, the Internet, and the Digital Camera on traditional print and pre-press services.

While most of the publically traded printers have recovered from their 2008 lows, only VistaPrint and its recent hiccup in Europe caused investors to panic and sell off the stock. Trading today in the high 30’s, it remains a solid company with excellent growth potential in Europe, the US, and now Australia. Its management is solid and takes prudent risks on expansion and the tentative move into TV. While TV did not pan out, the expansions domestically, in Europe and Australia were will planned and the operating issues of the most recent quarter are most likely a one-time issue.

Many following the Quad IPO still feel the stock is undervalued at $45 and see its well managed merger with World Color as offering huge upside synergy savings over the next two years. RR Donnelley led the pack when it rescued Banta from the unfriendly Cenveo proxy offers to Banta shareholders. Those unfriendly offering letters forced Banta to prepare for major cost savings well before the RRD rescue. The World Color bankruptcy provided management with much of the same incentives before the Quad offer. In addition, combine that with closing some very tired iron plants, this should work out well for Quad, its customers, and the shareholders who may see the stock go to $60.

Cenveo remains limited to acquisition opportunities. The failure of the NEC management to recognize that Burton’s offer of $140MM is just one of many for that great old NEC. It was their last great ability to monetize a shrinking envelope market. Cenveo consistently merges like companies into its well-managed platform and wrings even more redundant costs out of the combined entity. Bob Burton remains the best operating CEO in our industry.

As of this date, Vertis continues its nearly six-month saga of trying to refinance its Balance Sheet and long-term debt. While other printers continue to build 1MM square foot mega plants, Vertis is mired in the past. RRD and Quad’s mega plants maximize supervision over a larger platform of inventory, press, bindery, and postal/wholesaler freight distribution economies of scale. Vertis remain mired in the ACG acquisition and the old Treasure Chest footprint of many small plants scattered around the country, most filled with 10-20 year old presses, many with the wrong cut-off as well. These two factors along with the continued slide of FSI revenue and share hurt the still robust Direct Mail portion of Vertis.

While printers face the continued move to digital content and the growth of the iPad, well-managed companies like RRD, Quad, and Cenveo will still deliver solid performance to their shareholders. It will be a struggle yet they are still likely to emerge, along with VistaPrint, as solid companies. Management should continue hitting their earnings numbers, as the consolidation of the market continues and the big four continue to gain a bigger share of the smaller printing pie.