Deluxe Corp

Business Services
Target Price


Quick reminder (1/7/2022)
  • new management came in from First Data with a plan to return to organic growth in lieu of an acquisition strategy. This resulted in both opex and capex investments into the business and cash flow has declined. The pandemic hit which slowed progress on sales wins. All the while, they acquired an attractive business at a high multiple with a lot of debt. This is leaving me skeptical that the plan is going to work out… I’m watching over the next 2-3 quarters to make sure things are moving in the right direction. If not, it will have destroyed a lot of value from what this business was under prior management.
First American acquisition hasn’t been a big success — 3Q21 results show flat EBITDA growth following the $1bn deal!

2022 guidance — as of 4Q21 earnings release — still incorporates organic revenue growth of only 0-2%
DLX historically has been trading at ~9x FCF and 7.6x EBITDA — 2022 guidance implies $204m FCF ($4.60 per share) for a 6.5x multiple
Free cash flow — final “transformation” initiative, replacement of ERP system, is set to finish in 1H22 which was the biggest cash consumer project — should have big impact on incremental cash flow in ‘22-’23

Financials & Valuation

There are 43.5m shares outstanding as of 1Q22 x $23 share price = $1bn market cap. Net debt is $1.63bn for a $2.63bn enterprise value. Guidance calls for ~$415m 2022 EBITDA for 3.9x leverage and 6.3x EV/EBITDA.


August 2022 (2Q22) — Earnings and cash flow bottoming

Revenue grew as Deluxe is finally lapping the First American acquisition from 2Q21. Earnings were down 20% YoY and FCF was very low.


Management continues to reiterate that FCF will be up “meaningfully” in 2H22 and EBITDA finally looks to be bottoming out.

The stock remains incredibly cheap with a very valuable payments and cloud services business. The check manufacturing segment continues to be a big cash generator and is declining at a very slow pace. Promotional products doesn’t seem to fit the portfolio and should likely be sold for debt paydown. Leverage is high at 3.9x and likely needs to come down for a multiple re-rating.

7x EBITDA would mean a $29 share price. This is quite a step down from previous price targets but I find it hard to sell at a time when fundamentals are bottoming out. If no progress is made in the next 2 quarters, it could be time to move on.

4Q21 Update
  • Link to earnings release
  • Full year 2021 results — ~12% revenue and EBITDA growth; earnings declined ~4% from added interest expense and share count
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  • Fourth quarter results were pretty good — revenue and EBITDA growth of 23-25% but EPS down 8.7% — entirely from the added interest expense in the First American Acquisition (+$15m YoY)
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3Q21 Update
  • Not stellar results — revenue up (from First American acquisition)... EPS down 25%,... EBITDA flat
  • Guidance unchanged
    • Excluding First American, revenue growth of 0-2%
    • EBITDA margins 20-21%
    • Capex $95-105m
    • Tax rate of 25%
  • Stock is down ~10% to $35 per share. There are 43m shares outstanding = $1.5bn market cap. Net debt is down to $1.66bn = $3.16bn EV. Estimates call for 2021 EBITDA of $405m for a 7.8x multiple. Trailing EPS is $5/share for a 7x earnings multiple.
  • Key question — Can they grow revenue and earnings? They've invested a lot in the business (both through opex and capex); now they need to show it can expand the topline (and EBITDA along with it)

Deluxe Corp ($DLX) — Initiation (1/26/20)
Deluxe Corp ($DLX) — 2Q20 Update (8/3/20)