The commercial printing industry has seen a lot of changes since it was launched by Gutenberg in 1450. Even greater changes are just ahead in the digital future.
While the traditional newspaper may well disappear when low cost, lightweight, rugged and easy to read iPad / Kindle (AAPL / AMZN) type devices become ubiquitous, it is a safe bet that people and companies will still want to print high quality color images on paper for brochures, hand outs and specialty magazines for many years to come. When the number of copies required is more than a few hundred, do-it-yourself printing on the home or office color printer becomes too expensive on a per-copy basis.
This is where commercial printers earn their revenue. Though the industry experienced a 4% decline in sales in 2008 and a 16% decline in 2009, the National Association for Printing Leadership estimates that commercial printing revenues in 2010 will grow by more than 2% to approximately $74 billion.
A multi-billion dollar segment of the overall commercial printing market is composed of digital offset printing presses and CTP printing plates which allow for the production of printing plates directly from the computer without requiring film as an intermediate step.
The market for these devices is divided among a number of well known companies such as Cannon (CAJ), Eastman Kodak (EK), Xerox (XRX) and a feisty micro cap contender with a colorful past, Presstek (PRST). I believe that Presstek shares are very attractive at their current price, and have not yet fully discounted the recent successes of the new management team and the potential for much higher sales in coming quarters. My reasoning is the following:
1) This micro cap share (current capitalization approximately $150 million) is not only "under the radar" of most new investors, but also is widely distrusted by more experienced investors who recall when Presstek was a Wall Street darling years ago. As recently as September of 2005, the share traded at over $13 dollars.
However, along with the credit crisis and severe contraction in the commercial printing industry, Presstek shares were battered by an informal SEC investigation initiated in March of 2007 which became a formal investigation in February of 2008, related to matters arising from the Presstek's announcement of preliminary financial results for the third quarter of 2006.
On March 9th of this year the company announced that it had reached a settlement with the SEC to pay a civil penalty of $400 000 to resolve the matter. The settlement amount had been previously fully reserved in the 3rd quarter of 2009.
In the words of Jeff Jacobson, Presstek's Chairman, President and CEO,
The investigation related to matters that occurred prior to the changes in executive leadership which took place in 2007. We feel very strongly about corporate governance and we are pleased to put this legacy issue behind us.
While the new executive team of Presstek are first rate professionals (Mr. Jacobson was CEO of Eastman Kodak Polychrome Graphics before being recruited to restore credibility to Presstek in May of 2007), the shareholder base of Presstek continues to be a very unhappy crowd.
In researching this article, I was struck by the depth of the anger and sense of betrayal and apathy by many current shareholders. This company has "tripped up " some the best people in the investment business, and they will not be quick to return to the share despite the recent positive news. For example, George Putnam of the consistently excellent "The Turnaround Letter" recommended Presstek in June of 2005 when Presstek quoted at $8.58 per share. Significantly, this respected expert still has Presstek on his small cap buy list.
2) Under the new leadership team, the company has reached a critical turning point over the past several months. Apart from the settlement with SEC, fourth quarter 2009 losses were reduced to only 4 cents per share with positive EBITDA of $1.1 million and a reduction of debt net of cash of $4.2 million. The company has also announced a new $25 million revolving credit facility with PNC (PNC) under favorable terms, and the sale of its Lasertel non-core business subsidiary to SELEX Galileo for approximately $10 million.
Additionally, earlier this year the company formed Presstek Asia Pte. Ltd., a legally incorporated entity to better enable Presstek to support is growing distribution channel in Asia. Finally, the company is about to launch its new 75DI digital offset press, the largest and highest capacity machine ever from Presstek. This machine is generating considerable positive buzz in the commercial printing industry.
In the conference call following the announcement of fourth quarter earnings (see transcript here), there were more questions from institutional investors than in previous quarters, which may well be a sign that institutional investors are thinking about to returning to this share despite its current micro cap status and turbulent recent past.
The purchase of a printing press is a very serious capital outlay for most participants in the highly fragmented commercial printing industry. One of the key reasons for my bullish call on Presstek is that by "turning the corner" they will succeed in removing any doubt that they are a viable going concerning which will continue to support its products in the years to come. Many printing businesses in the past several years have rightfully hesitated to link their future with Presstek through purchasing their printers as the share plummeted and the company was rocked by the SEC investigation and top leadership turnover. The success of the 75DI will be a major test of company's ability to finally eradicate these concerns.
3) Presstek's products are terrific, widely recognized as the best in their business segment. The company is a major innovator, and is considered the inventor of DI digital imaging printing, holding over 500 printing related patents. Their technology is state of the art and is simply the cheapest and fastest for the vast majority of commercial printing needs. Crucially, the company focuses incessantly on speed and simplification, allowing commercial printers who use their machines to switch quickly between jobs (making smaller print runs more profitably) while utilizing a labor force that does not require as much training as is required to operate their competitor's machines.
Additionally, as Presstek's technology permits the elimination of intermediate steps in the printing process which utilize film and related chemicals, the company is able to situate itself in the marketplace as a "green" company, a positive consideration for many consumers.
4. Finally, and crucially, Presstek's shares now offer a compelling "value and growth" micro cap opportunity. Even after the recent rise in the shares, the market currently values the company at only one time sales, while the company maintains a gross margin of over 32%. The company is expected to return to profitability in 2010 and for the reasons stated above I believe that the results will surprise to the upside.
Though the industries are not related, this share reminds me a great deal of the situation of SeraCare (SRLS) when I wrote "Five Reasons to Buy this Biotech Microcap with Recurrent Revenue" in August of 2009. Like Presstek, SeraCare also had also recently passed through a major regulatory scandal and had a new highly motivated and well qualified management team put in place as a consequence. However, shareholders had been burned and rightfully felt betrayed, and held a 'wait and see' attitude which was a weight on the share price.
Since then, the new management team has continued to rebuild it’s the company's lost credibility, and the shares have risen over 50% since the article was published on Seeking Alpha. I believe that a similar outcome for Presstek is very likely in the coming quarters.
Disclosure: Author is long PRST common shares
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