ACCO Brands: speculative buying on valuations despite high leverage

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Investment thesis

ACCO brands (NYSE: ACC) should benefit from a strong back-to-school and back-to-office trend, which, together with the pricing action taken on July 1, should support growth in 2H FY22. This growth should be partially offset by lower volumes from the PowerA brand, which sells gaming accessories. The gaming industry is experiencing a shortage of semiconductor chips and a reset in demand levels due to the reopening of the post-COVID economy. The stock is trading at a discount to historical levels and although its high level of leverage increases risk, it may be a speculative buy at current levels.

FY22 Second Quarter Results for ACCO

Last month, ACCO Brands announced financial results for the second quarter of FY22 that fell short of expectations. Revenue for the quarter increased 0.6% year-over-year to $521 million (vs. consensus estimate of $538.57 million). Adjusted EPS was down 14% year on year to $0.37 (vs. consensus estimate of $0.42). Revenue growth in the quarter was driven by higher prices (8% YoY), partially offset by lower volumes (-3% YoY) and a negative impact of 4.6 % of unfavorable currency translation. Adjusted operating margin in the quarter decreased by 180 basis points year-on-year to 11.2% year-on-year due to the impact of inflationary pressures on material and freight costs, resulting in lower 14% YoY of Adjusted EPS in the quarter.

Revenue outlook

Q2 FY22 comparable sales were up 5% year-over-year, driven by improved pricing, excellent back-to-school sales in North America, a strong post-COVID recovery in Latin America and the return of office momentum to the market. Comparable sales represent net sales excluding the impact of acquisitions and foreign currency translation. Excluding sales of gaming accessories, comparable sales increased 9% in the quarter. Sales of the PowerA brand, which sells gaming accessories, fell due to the reset in demand in the gaming industry and shortages of semiconductor chips.

In North America, same-store sales increased 4% year-on-year due to higher pricing and higher volume for the majority of products, partially offset by lower volume for gaming accessories. Demand for school and business products and computer accessories remained strong. For the back-to-school sales season, retailers have brought some of the orders forward to ensure they have stock levels to address supply chain issues. In EMEA, comparable sales were flat year-over-year due to price increases, partially offset by volume declines. Segment volumes were negatively impacted by high inflation in the region and reduced demand. Same-store sales in the international segment increased 20% year-on-year, driven equally by higher prices and higher volumes. The volume growth was due to improving demand in Latin America, particularly for note-taking products in schools and the opening of businesses for in-person work.

In December 2020, ACCO acquired PowerA, which is a leading provider of third-party video game controllers, power charging solutions and headsets. PowerA has a strong history of double-digit sales growth, and the company (PowerA) was able to generate 22% sales growth in FY21 post-acquisition. However, for FY22, ACCO Brands has reduced the year-over-year sales growth guidance range for PowerA from +5% to +10% previously to minus 10% to minus 15% due to weak first half of FY22 results due to slower demand. for gaming accessories and semiconductor chip shortages. During the COVID years, demand for the gaming industry skyrocketed as people spent more time at home. However, as the economy reopens, people are more inclined to travel and do other things, leading to lower demand. It is also experimented by companies such as NVIDIA (NVDA), Turtle Beach and Corsair. However, in the medium term, demand for the gaming industry is expected to normalize and reach pre-COVID levels by the end of 2023, after which it can resume its long-term growth trajectory.

The long-term outlook for the gaming industry looks solid with an increasing number of people playing around the world, and the industry is expected to grow in the simple mid-rise figures. The company’s underrepresented presence in EMEA and Asia gives it the opportunity to gain market share and double-digit growth.

ACCO cut the midpoint of its comparable sales growth forecast and narrowed the range to 3.5% to 8.5%, previously 4% to 6%, mainly due to industry headwinds. Thurs. There are also concerns due to the current macroeconomic situation and Fed rate hikes. However, so far the benefits of the reopening of the economy have offset macro concerns with strong restocking activity for back-to-school products and back-to-office trends driving growth and I expect that this trend continues. The office occupancy rate has increased over time Kastle office occupancy barometer, but it is still lower than the pre-COVID occupancy rate. Price action taken by the company on July 1 to offset inflationary cost pressures should also offset any headwinds on volumes.

ACCO margins

The Company’s margin in the second quarter of FY22 was impacted by the cumulative price and cost variance despite numerous price increases. To compensate for this, the company made another price hike in July, which should benefit 2H FY22. The North America segment adjusted operating margin decreased by 160 basis points year-on-year to 18.7% due to higher raw materials, including paper, and higher transportation costs. EMEA segment adjusted operating margin decreased by 730 basis points year-on-year as previous price increases were unable to fully offset inflation and increases in raw material and energy costs. local origin. The International segment’s adjusted operating margin improved by 390 basis points year-on-year to 11.2%, thanks to higher sales, a stronger product mix and cost control.

ACCO Gross Margin and Adjusted Operating Margin

ACCO Gross Margin and Adjusted Operating Margin (Company Data, GS Analytics Research)

Going forward, the company’s adjusted margin in all three segments is expected to improve in 2H of FY22 as the company’s pricing actions impact P&L as well as cost moderation. higher inputs.

Evaluation and conclusion of ACCO brands

The stock is currently trading at ~3.66x the consensus FY22 EPS estimate of $1.40 and ~3.11x the consensus FY23 EPS estimate of $1.65, which which is below its five-year average PER of 7.89x. The low P/E is likely due to the company’s high debt levels – the company has net debt of $1.192 billion, or approximately 4.75x its trailing twelve month EBITDA of $250.7 million. On an EV/EBITDA basis, the stock is trading at 5.90x forward estimates, which is also a discount to its 5-year average of 6.66x.

In the short term, the company’s turnover and margin should improve, driven by the pricing actions undertaken and a solid back-to-school period. As demand in the gaming industry stabilizes and supply chain constraints ease, the company’s revenue should improve over the long term.

While there are some risks associated with high leverage levels, I think the stock is too attractive to ignore, especially given the tailwinds ahead like the outlook for EBITDA growth as the economy will reopen. Therefore, I believe that a small speculative position can be taken in ACCO shares and, therefore, I rate the stock as a buy.

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