Valassis Communications: Tried and true (if annoying) advertising

Andrea Orr | May 08, 2008 6:20am EDT | 1 Comment

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Judging by this week’s business news headlines featuring Microsoft Corp.’s (Nasdaq:MSFT) on again/off again talks to buy Yahoo! Inc. (Nasdaq:YHOO), it would be tempting to surmise that Internet advertising is the only advertising game in town.

But headlines can deceive, or at least distort the true state of affairs in politics, in life and in business. While online advertising is indeed a thriving business, another segment of the advertising industry (arguably as far offline as you can get) is not doing so badly either.

Valassis Communications Inc. (NYSE:VCI) is a company that provides direct mail advertising and marketing services to some 15,000 advertisers worldwide, and business is booming. Fiscal 2007 revenues, helped significantly by the March 2007 acquisition of its rival Advo Inc., grew to $2.24 billion from $1.04 billon in 2006. Net income totaled $58 million in 2007, up from $51.3 million in 2006.

All this from a direct mail company, the kind that puts the inserts in your Sunday paper and fills your mail box (not your email) with those coupon books that some people love and others send straight to the recycling bin.

No matter what you may think of direct mail, advertisers continue to love it, often preferring it to other newer and higher-tech forms of advertising. Eastman Kodak Co.’s (NYSE:EK) chief marketing officer, Jeff Hayzlett, recently said he spends 22% of the company’s advertising budget on direct mail.

Livonia, Mich.-based Valassis, which was founded as a commercial printing company in 1970, now offers a variety of direct marketing services, including the very successful Shared Mail product, in which a collection of ads, coupons and promotions from different consumer goods companies is mailed out to households in a single envelope.

Following the report last week of a 65.3% rise in first-quarter revenues, Valassis shares have risen from $14.38 to close at $15.89 per share on Wednesday. And a number of analysts believe the stock, still selling below its 52-week high of $18.97, remains undervalued.

“The stock is still cheap,” said Edward Antorino, an analyst with Benchmark Equity Research, said in an interview with SmallCapInvestor.com on Friday. “The company has had three better-than-expected quarters and the Advo deal is really starting to pay off.”

Buying Advo was, in hindsight, a very smart move for Valassis, but up until the deal’s closing, even Valassis wasn’t so sure. After agreeing to a $1.3 billion acquisition in 2006, it later sued to get out of the deal, claiming that Advo had inflated its earnings. Although Valassis ultimately reached an agreement to buy the company at a lower price of $1.1 billion, public opinion surrounding the move was seriously damaged by then, and only exacerbated when the first post-merger quarterly earnings report proved disappointing.

More recently, the company’s results are revealing how important the deal was in bolstering the company’s shared mail division and offsetting weakness in other units, such as its Free-Standing Insert business, where revenues in the most recent first quarter fell 10%.

Robert W. Baird analyst Mark Bacurin said in a research report that by joining forces with Advo, Valassis created the largest shared mail program in the United States, reaching about 80 million households per week, and set the stage for significant costs savings.

After the report of first-quarter earnings last week, Bacurin raised his price target on Valassis stock to $19 and reiterated his “outperform” rating.

Six analysts who follow the company are on average predicting revenues will grow to $2.51 billion in 2008 and $2.56 billion in 2009 from $2.24 billion last year. They forecast that net income will grow to $1.37 per share in 2008 and $1.56 per share in 2009, from $1.24 per share in 2007.

While some are mildly concerned about the company’s market share loss in its free-standing insert business, and looming paper price increases that could weigh on margins, they still expect that any resulting slowdown will be more than made up for in the rapid growth of the shared mail business and continued merger-related cost savings.

Even if you don’t care for the direct mailings that come to your house, know that in this day of fancier forms of advertising, these plain paper promotions remain as the type of investment that could provide you with some “green” paper of your own.

About the Author
Contributing author Andrea Orr has worked as a financial and business journalist for more than 15 years in New York, Los Angeles and northern California. Read More