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Published: January 9, 2010
Admit it: You still have in the back of
your desk drawer that long-forgotten key ring attached to the
mini flashlight with the name of an insurance company emblazoned
on it. The one you picked up at the auto show three years ago.
And the flashlight still works.
But if you've been seeing a lot fewer of these "chotskies"
recently, and if the magnet on your refrigerator still displays
the home team's schedule for the 2006 season, blame the economy.
When commerce slows, companies cut discretionary expenses.
But when an economy turns, one of the first orders of business
is to re-build awareness in the eyes of customers. Ad campaigns
are an obvious solution, but many companies also look to splash
their name on as many products as possible, giving out freebies
and other promotional items that reinforce what’s known as
“brand ubiquity.”
As branding budgets loosen in 2010, Chicago-based
Innerworkings (Nasdaq: INWK) should be a clear beneficiary.
Prior to the recent economic downturn, the company established
itself as an emerging leader in the printing/branding field, as
sales soared to $419 million in 2008 from just $5 million in
2002. That's a lot of neon highlighters. More recently, the
company has faced challenges, but as those problems resolve,
sales growth should return, and profit levels look to expand at
an even faster clip.
This past year surely took its toll, as sales likely fell closer
to $400 million, and per-share profits likely fell by more than
half to around $0.15. (Innerworkings releases year-end results
in mid-February). Though full-year sales were likely flat in
2009, organic sales growth has been negative for several
quarters, including a -15% drop from a year earlier in the three
months ended Sept. 30.
Yet as is the case with many companies, the economic slowdown
forced Innerworkings to take an ax to expenses. And as we saw in
the corporate restructuring programs back in the 1990s, profits
should grow modestly as the economy initially rebounds, but
really expand when the economy is in its second or third year of
the growth cycle.
Barring a “double-dip” recession, Innerworkings’ 2010 revenue
base is likely to grow about +10%, thanks to a combination of
new business wins and a modest bounce back in spending among
existing customers. Assuming that key customers resume
historical spending rates by 2011, and Innerworkings is able to
continue to secure new customers, sales could grow another
+10-15%, while profits expand at a far faster clip. This assumes
that the company holds off making acquisitions – which have
typically been accretive.
Though the company is likely to earn around $0.30 a share in
2010, profits could well approach $0.45 by 2011, assuming a net
profit margin of 4% on $525 million in sales. Net margins
approached 5% in the summer of 2008 before sales started to
fall. If Innerworkings’ management can boost net profit margins
back to the 5% range, and sales growth rebounds another 15% in
2011 to around $600 million, then per share profits would rise
further to around $0.60. While profits appear poised to rebound,
share prices haven't yet reflected the improved outlook, having
fallen from around $16 two years ago to the mid single-digits.
As the economy rebounds, look for Innerworkings to resume its
acquisitive ways. The printing/branding industry is still highly
fragmented, and management has noted that a range of acquisition
targets remain in their sights. The key for investors – which
management repeatedly acknowledges – is for the company to seek
growth that is profitable, and not just for the sake of top-line
expansion.
Organic growth remains on tap as well: Innerworkings is able to
handle printing assignments at a lower cost than clients can get
on their own. Indeed, many customer wins come not from poaching
accounts from rivals but from a decision to outsource the
function. That process of outsourcing still has ample room to
play out. The amount of spending in play is sizable when you
consider how many direct mail pieces, brochures, catalogs and
promotional items are generated each year.
With a rebounding economy, a fragmented industry, and a proven
desire to boost sales through direct customer wins and
acquisitions, Innerworkings looks set to resume its heady growth
rates by next year. Although management will likely retain a
still-cautious tone for 2010 on next month’s conference call,
the long-term outlook is bright.
-- David Sterman
Contributor
StreetAuthority
P.S. Here's another promising ad firm that could deliver +100%
gains: This up-and-coming star operates the nation's largest
in-theatre advertising network in an industry that has been
expanding at a +24% annual clip. With operating margins of 45%,
it's one of the most profitable firms in our coverage universe.
It's also one of the most undervalued: The company has gained
+16.5% since my colleague Nathan Slaughter recommended it in
September -- but according to his estimates, it has another
+100% to go before reaching its fair value price. This company
made his list of Top
Ten Stocks for 2010 (it's Stock #7).
Get his full analysis here. |
