Google Inc. (GOOG): Is RR Donnelley & Sons Co (RRD) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does RR Donnelley & Sons Co (NASDAQ:RRD) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

RR Donnelley & Sons Co (RRD)

What we’re looking for
The graphs you’re about to see tell Donnelly’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at RR Donnelley & Sons Co (NASDAQ:RRD)’s key statistics:

RRD Total Return Price Chart

RRD Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 3.7% Fail
Improving profit margin (936.4%) Fail
Free cash flow growth > Net income growth (60.5%) vs. (2,286.1%) Pass
Improving EPS (2,676.9%) Fail
Stock growth (+ 15%) < EPS growth (36.5%) vs. (2,676.9%) Fail

Source: YCharts.
*Period begins at end of Q4 2009.

RRD Return on Equity Chart

RRD Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (5,995.8%) Fail
Declining debt to equity 3,160.0% Fail
Dividend growth > 25% 0.0% Fail
Free cash flow payout ratio < 50% 38.5% Pass

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we’re going
RR Donnelley & Sons Co (NASDAQ:RRD) barely squeaks through with two passing grades, and one of those is a technicality. Free cash flow might be in positive territory, but over the past three years, the company has shaved a great deal of that amount off as its businesses have declined. Is there any hope for this high-yielder with the near-double-digit payout, or is this one dangerous stock best left on the rejection pile?

Donnelly has actually been trending higher through 2013, which could be the start of a sustainable turnaround, but which is more likely to be a short-term dead-cat bounce based on dividend seekers jumping into a depressed stock. Consider what happened to the company in 2012: Its biggest news-making event was a pitiful filing error on Google Inc (NASDAQ:GOOG)‘s behalf with the SEC.

Someone at Donnelly got fat fingers with Big Google (NASDAQ:GOOG)’s quarterly report, and the reaction was so intense that trading in the stock had to be halted. Think about that. A $200 billion-plus company’s stock was halted because someone at Donnelly screwed up with the SEC. RR Donnelley & Sons Co (NASDAQ:RRD)’s ownership of the EDGAR online system, where millions of stock researchers (including yours truly) go to find SEC filings, makes this more egregious. Accuracy is essential, and human errors are unavoidable — but how can you let it happen to one of the most-followed companies in the world? Google Inc (NASDAQ:GOOG) switched filing providers after that brouhaha. How many other companies did the same, or are considering it?

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