Deluxe Corp

Debt Analysis Example: Deluxe Corp (DLX)

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SEPTEMBER 04, 2009 – COMMENTS (0) | RELATED TICKERS: DLX

In the previous article, Debt in Business Analysis, MagicDiligence did an overview of analyzing a prospective investment's debt burden. In this article, we'll go through a Magic Formula example that covers a lot of the bases: Deluxe Corporation (DLX).

Before we begin, it's important to set a context for analyzing the debt. Is this a heavily cyclical company that suffers huge swings in revenue and profitability over short periods of time, or does it have fairly stable sales and profit margins? What is the near and medium term prospects for earnings growth? These are both important points - cyclicals and declining businesses obviously are riskier if they have worrisome debt burdens.

Deluxe's main business is printing and selling checks. This is a fairly stable business - even in poor economic times, folks still have mortgages and utility bills that they often pay with checks. A look at the financial statements confirm this: Deluxe's revenue has never experienced more than a single-digit percentage change in any of the past 5 years, and profit margins have been relatively predictable. However, checks as a payment method are also declining as online bill pay and debit cards become more popular, with check volume declining 4% annually this decade. The financials also confirm this: Deluxe's annual revenue growth since 2004 is minus 2% per year, and operating profits down 9% annually, with operating margin declining from 22% in 2004 to just under 16% today. So, while Deluxe is a fairly stable business, it's also a declining one and will continue to be.

Let's start by getting an idea of Deluxe's cash resources, as this is what's needed to service, and eventually pay off, the debt. The company has about $18 million in cash on the balance sheet. Trailing 12-month free cash flow (cash from operations - depreciation) is about $177 million....