ACCO Brands is a unique small company based in Northern Illinois. The company makes school supplies, office supplies, and home goods. Given the steady cash flow generation of the company over the last ten years, management's strong capital allocation track record, and the low free cash flow multiple; this stock looks to be undervalued by a good amount.
ACCO manufactures everything from notebooks to air purifiers. It is a portfolio of brands, many of which are market leaders. The brands include Five-Star and Mead notebooks, Swingline staplers, and others. With the exception of a few of the tech related brands, none of these business lines is going to grow much. The market for most of these products is pretty mature and fairly stable. In addition, with an operating margin in the high single digits, they are unlikely to draw in significant competition. There is, of course, competition but given the market size and growth, it is highly unlikely that anyone makes a strong push for market share. This is all to say that ACCO is likely to be a slow growth cash cow for the foreseeable future. It will not achieve remarkable headline numbers, but the business should generate plenty of cash for management to put to work.
When a company generates a good amount of cash, and the core business is not growing, much depends on management's capital allocation strategy. Are they plowing good money after bad by continually investing in the existing business or are they looking for growth in other places? Generally speaking, there are three ways to invest the capital that a business generates. Management can return the cash to shareholders through a dividend or share repurchase, invest in growth through acquisitions or new business lines, or pay down debt. The way to score a management team on this is by looking at the return on invested capital. How well do they invest the money that has been put into the business?
Boris Elisman has been involved with ACCO for nearly 20 years and CEO for nearly ten. Since 2012, cash earnings (before investing in working capital or fixed capital) have totaled just over $1.7 billion dollars. About $100 million has been used to pay a dividend, $240 million has gone towards share repurchases (net of shares sold), and debt has decreased by $83 million. That means the capital base of the business has increased by nearly $1.3 billion over the last ten years. In that same time, cash earnings have increased by $138 million for a return on invested capital of 10.78%. This is not spectacular but is nonetheless a good record of responsible stewardship of investor's money.
The clear strategy that management has used is to take advantage of a low interest rate environment to make debt funded acquisitions and then rapidly pay down the debt using cash flow. This has worked well in the past but is a risky strategy and will become more difficult as interest rates rise. I would argue that growth by acquisition is no longer the best strategy. At a free cash flow multiple of approximately five times, the most attractive acquisition target might be ACCO brands itself.
A share repurchase program of at least $50 million per year (but preferably closer to $100 million) would significantly benefit shareholders by increasing their ownership stake and driving up the earnings multiple on the stock. Normalizing for investment in working and fixed capital, ACCO generates about $170 million in free cash flow per year. This cash is currently used to pay a dividend of about $25 million with the remainder going towards paying down debt. Even a $100 million per year share repurchase would allow for the dividend and debt reduction to continue.
Over the past year, the average value of shares traded per day is about $4 million. This means that about $2 million in shares are bought each day. With a share repurchase program, ACCO could increase the dollar value of shares purchased by 20%. This would have a dramatic impact on the price of the stock. Many of the current shareholders are index funds and mutual funds, which could hold for the long haul if the price were to increase, increasing the effectiveness of the share repurchase strategy.
Even if management does not engage in a share buyback program, this stock is still a good value. A quick calculation, assuming no growth and a 10% discount rate, gives an estimated intrinsic value of $17.74 per share, more than double the current stock price. Management's track record shows that they are good stewards of investor's capital and that they are unlikely to do anything reckless. There is some history of share repurchases and on the most recent earnings call, there was talk of returning more cash to shareholders. This is a good company, with a stock price that offers a margin-of-safety, and a capable management team.