Description

Moore is a manufacturer and distributor of business forms. The business had been mismanaged during the late 1990s with a ridiculous cost structure, and in Dec 2000 private investment firm Chancery Lane made a $70mm subordinated convertible debt investment in the company which has since been converted to equity. New, cost focused management, led by CEO Robert Burton came on board at the same time in Dec 2000.

The stock has run quite a bit since the transaction, as management has turned the business around but I think it still represents decent value:

113mm shares @ $10.75 = $1.215bil market cap. Net debt (after figuring in recent acquisitions, the conversion, and a pension issue) is about $100mm. 2002 EBITDA should come in at $200mm, implying a 6.6X multiple. Capx was $40mm in 2001, should be $60mm in 2002. FCF is running at close to $20mm per quarter.

Another $30-40mm of cost savings for '03 plus modest growth gets to $250mm ebitda for 2003, by year end '03 this could be a $300mm ebitda runrate company. There are not perfect comps here - WCS, SR, and MWL are companies that are mentioned as close and they trade for 5-7x EBITDA. The interesting thing about MCL is that 45% of their EBITDA cames from what they call "outsourcing", which is printing monthly bills for big companies like Verizon. This business is not advertising dependent, is less competitive, is growing faster (sales will be about $400mm in 2002 and management thinks it can double that in 4 years), is less capital intensive and therefore deserves a higher mutliple. If we give 6X to the regular forms business and 8X to the outsourcing (one of the sellside analyst gives this part 9X), that implies a stock price at year end '03 (assuming outsourcing has grown to only 50% of EBITDA) of $19.12 (all debt paid down and cash accumulates at current rate).

What has me intrigued is that it was disclosed in December that senior management increased its personal equity stake by $3mm through open market purchases. These shares were bought at over $9/share. The CEO bought roughly $2mm of shares, effectively doubling his commitment (he had reached into his pocket and bought $2mm worth in Dec 00). Prior to Dec'01, management had been restricted from buying shares, and the press release said management would buy more shares in 2002.

Catalyst

1) Cost cutting; 2) Growth of outsourcing business; 3) FCF being used for smart things (buyback, accretive deals, etc)