Deluxe's Delightful Decline

I love to play poker. It's one of my favorite pastimes, when I'm not on tilt. I've got poker on the brain, too, after a happily profitable weekend trip to Vegas to splash a few pots. (Of course, I've paid a physical price for my money-grubbing gluttony, which you can read about here.)

A common misconception in the game that took me awhile to learn is that you should never draw to what's called a "gutshot" straight -- a straight made only by one of four cards in the deck. Although it's a good rule of thumb because the odds of making such a hand are usually long -- often better than 10 to 1 against -- it can pay to try to make it, but only if the straight is likely to be the winning hand and if the pile of chips you'd collect would cover more than 10 times your bets.

Confused yet? Don't be. It's simple math, and it proves that going against the given maxims in poker can sometimes be profitable. Fortunately, the same is true for investing. For example, take Deluxe (NYSE: DLX  ) , the largest maker of business forms and printed checks, which you wouldn't typically consider a worthwhile investment because it's a business long in decline. But should you?

In a word, yes. Deluxe is in a delightfully declining business that management is handling deftly. For the second quarter, revenue declined again, but earnings skyrocketed to $0.91 from $0.80 a year ago. That's a 13.8% increase, which management attributed mostly to aggressive share buybacks. Free cash flow was also up more than $73 million after a negative rate last year, and gross margins have improved by a point. That's great fiscal discipline that has allowed Deluxe to not only boost earnings but also reward shareholders with a market-trouncing dividend of 3.36%.

Boring, staid, slow, declining, old. Sure, these adjectives describe some of the worst companies in which you could buy stock. But they also describe some of the best. How do you tell the difference? Just like a gutshot straight, it depends on what you're getting for your money. In the case of Deluxe, it's probably a lot more than the market is giving it credit for.

Fool contributor Tim Beyers isn't anywhere near as good as most of the poker players who frequent the On Tilt discussion board. He suggests you go there before you try your hand in a live game. You'll learn more and pay less. Tim owns no shares in any of the companies mentioned, and you can view his Fool profile here.


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8/22/2014 4:02 PM
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