Back of the envelope investment Summary :
ARC Document Solutions provides digital printing, scanning & imaging, and managed print services. It had approximately 32 cents of FCF in 2021, corresponding to a yield of 10.5% at the current price of 2.97 dollars. Based on company growth each quarter, adjusted FCF is likely to be between 37 and 40 cents in 2022, resulting in a FCF yield of 12 to 14%. With less than 27 million in net debt, including capital lease commitments, FCF would trickle down to shareholders as dividends and share buybacks. The company is still run by the founder and the management appears to be shareholder-friendly, conservative, and not interested in taking big risks
Company Overview –
The image below shows how the Arc’s activity can be divided into 3 categories.
The largest business is digital printing. Their specialty is custom, short-run, high-quality printing, not mass printing like catalogs, which is highly competitive. Next is managed print services, where the printing equipment is placed in the customer’s office and the customer pays for its usage. The scanning and digital imaging division is the smallest, but it is growing quite rapidly as companies want to digitize paper documents. ARC is a HIPPA compliant scan solution provider.
Competitive Advantages –
ARC Printing consistently has Google customer reviews rating it above 4.9 stars, giving it a significant edge over other printing services. With 140+ locations around the United States, ARC Printing has a much broader reach than its competitors. In the managed print services segment, due to its many physical locations, ARC is able to provide a higher level of service than its competitors who typically don’t have printing locations
Management –
The company’s founder, Kumarakulasingam Suriyakumar, still acts as its CEO. Management appears to prioritize giving dividends and buying back shares over more aggressive, risky growth. There is no major red flag concerning management.
Valuation –
Given that the company has a net cash debt of only 27 million dollars, their default risk is very low. In 2021, their EPS was 22 cents but with increased revenue, we can project that their EPS in 2022 will be between 27 and 30 cents (FCF from 32 cents to 40 cents). FCF yield is 12% to 14 %, which is a good yield for a company that has little to no debt.
Management has announced that CAPEX is going to decrease, because more and more office customers are moving to hybrid or work from home models. This means that more of the printing in their managed printing segment will be done in stores, which reduces the capital cost of placing printers in customers’ offices and improves the efficiency of store utilization. This reduction in capex is going to result in increased FCF .
RISKS –
Recession-
I would categorize custom printing as more discretionary (at least a percentage of custom printing) so that revenue and profit can decrease during a recession. There are a couple of mitigating factors, however. ARC is not reliant on a single vertical for its revenue, so in the event of a recession, it can try to find new customers from different verticals to reduce the impact. Additionally, the company does not have much debt, so it can weather the storm of a recession with minimal risk.
Declining business –
As the world is moving more and more towards an internet and virtual reality-based existence, printing is definitely a declining business. However, ARC is making up for some of these disadvantages by expanding from 15+ industry verticals to 40+ industrial verticals and thereby gaining market share from its competitors
Competition –
In the field of digital printing, there are smaller players, but no competitor with multiple branches. There are many competitors for managed print services, and it’s a very competitive market.
Summary –
With a current dividend yield of 6.75 % (share price $2.97), very low debt, growing revenues and corresponding increased cash flow, minimal Capex, and conservative management, this should be a good investment.
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