Schawk, Inc. (SGK), RR Donnelley & Sons Co (RRD): This Stock Makes Customers’ Brands Stick

When I go to a store to buy any consumer product, it is usually the packaging that catches my attention amid the visual clutter. Schawk, Inc. (NYSE:SGK), is a brand development company which designs the graphics used in consumer products packaging, and helps its clients capture the attention of shoppers. Schawk provides its customers with critical services that drive the final purchasing decision. The stock is attractively valued with a forward P/E of less than 10 and a decent dividend yield of 2.60%.

High customer value relative to cost

A boss will definitely like an employee who draws a modest pay check, but does a significant amount of work that contributes to the company’s success. Schawk, Inc. (NYSE:SGK)’s graphic services are viewed in the same way by their customers. Although graphic services represent a small percentage of total advertising, promotion and packaging expenses for consumer products, they play a key role in the purchasing decision of consumers.

According to an OgilvyAction survey, 70% of shoppers make purchasing decision in the stores. You may have the most delicious and the healthiest food that resides beneath the packaging, but if the visuals on the product packaging do not communicate the intended message, the customers will just walk away. That is why Schawk, Inc. (NYSE:SGK)’s graphic services are so critical in catching the attention of their target customers and creating the connection between their customers’ brand and consumers.

Growth drivers

While there is stable demand for Schawk’s services from product line extensions by consumer packaged goods companies, the big leap in growth is coming from grocery retailers. Grocers are making a big push for private label products, given higher margins and increasing consumer adoption of such products. According to a Plant Retail report, private label sales for North American grocers are expected to grow to from $150 billion in 2009 to $209 billion in 2014.

Grocers are broadening their private label product range beyond frozen food to new product categories such as pet food and alcoholic beverages. Schawk, Inc. (NYSE:SGK)’s services are more likely to be used by these grocers, as they recognize the value of such services in differentiating their brands.

Peer comparison

Schawk’s peers include Matthews International Corp (NASDAQ:MATW) and RR Donnelley & Sons Co (NASDAQ:RRD). All three stocks have a stellar track record of positive free cash flow and dividends.

Matthews International derives half of its revenue from brand solutions, while the other half is generated from memorialization products used mainly in cemeteries. Its brand solutions include graphics imaging services similar to Schawk, Inc. (NYSE:SGK) for the corrugated and flexible packaging industries. In the first quarter of fiscal 2013, Matthews International Corp (NASDAQ:MATW) acquired Wetzel, a provider of pre-press services and gravure printing forms, to further expand its presence in Europe. Matthews International has increased its dividend every year for the past decade and sports a forward dividend yield of 1%.