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

After touching share prices in the mid-teens, Deluxe (DLX) is finally rebounding a bit back to $30…

2Q20 Overview

  • Q2 earnings were good with $1.15 in EPS, down only 30% YoY and sales down 17% YoY to $410m.
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  • Operating cash flow was $110m in 1H20 which was up slightly from 1H19 — capex came down a bit to $27m in the first half for free cash flow of $83m
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  • Checks continued their decline in Q2 (down 15%) but remain the highest margin segment with ~50% EBITDA margins… Deluxe is still seeing some success in the payments business with revenue growing >12% in Q2 and 15% YTD
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  • Cash flow is going toward debt paydown with COVID in full swing — net debt is now $768m, down from $830m in Q1 and $810m at the beginning of the year
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  • EBITDA was $83.8m in the quarter for a 20.4% margin compared to 17% in Q1 and 23% in 2Q19

Outlook

The earnings call shed a few additional details on the quarter and outlook…

Management is still opting to withdraw guidance given the uncertainty around COVID. Much of this business is still very heavily exposed to small business and small business formation in particular.

They have a large promotional products division (think: custom branded swag), a large website hosting platform, and of course the checks business which is driven jsut as much by new business checks as it is continuing checks.

New CEO Barry McCarthy, who came over from First Data, is leading a shift in focus on organic sales. He’s taking a breather from large share buybacks and M&A to do this. He still seems confident that Deluxe will be a mid-single-digit revenue grower with 20-25% EBITDA margins.

Valuation

Deluxe has 42m shares outstanding x $30 stock price = $1.26bn market cap

Net debt is $768m for a $2.03bn enterprise value

2019 earnings and EBITDA were $6.82 and $481m for multiples of 4.4x / 4.2x

Those figures are obviously going to come down due to COVID… estimates call for:2020 — $4.23 EPS / $338m EBITDA / $1.75bn sales2021 — $4.98 EPS / $328m / $1.75bn sales

Here are my estimates for the next few years as well as the past 8.5 years’ worth of results:

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I anticipate 2020 full year revenue recovers somewhat in 2H20 and finishes the year down 10% before rebounding 2% in 2021.

This is a cheap stock no matter how you view it — 3.5x 2023 EBITDA / 6x free cash flow — it all comes down to whether checks can hang in as anticipated and whether the growth businesses perform as expected.

This should be a $40 stock today and likely $60-70+ as the plan is executed over the next few years…