Deluxe: One Double That Got Away

We can make money just about anywhere in this market. Today, I'm talking about something more unusual: doubling your money in a business that has declining revenues, loads of debt, and difficulties integrating a company it bought to revive growth -- namely, check company Deluxe Corporation (NYSE: DLX  ) . However, not all doubles are created equal, and this is one double I'm happy to have missed.

Let's face it: Deluxe is fighting just to tread water. The company bought New England Business Services (NEBS) in an attempt to stave off steep declines in its own business. However, NEBS, which is now part of the small business services segment, isn't growing fast enough to offset the steep declines Deluxe is facing in its financial services business, which sells checks to financial institutions, and its direct checks segment, which sells checks using direct marketing to consumers.

With such gloomy prospects, it wasn't worth the risk, even at what seemed to be an attractive price. After seeing my call go against me, I thought a review of Deluxe's fourth-quarter earnings was in order.

For the quarter, Deluxe generated $47 million in net income, or $0.92 per diluted share, on $427 million in revenue. This was up from $39 million in net income, or $0.76 per diluted share, on $432 million in revenue. Per my calculations, net income for the year was $101 million, down from $158 million in 2005. (I'll get to the drop in a moment.) Revenues for the year were $1.6 billion, down from $1.7 billion in fiscal 2005.

Management's outlook for 2007 didn't offer much different. Revenues are expected to be flat to slightly lower. The small business services segment will grow in the low single digits, while the other two check segments will continue to shrink. And while I admire the company's feverish attempt to run a tight ship by cutting costs and managing high returns on capital, it's a sinking ship nonetheless.

The setup
Back on June 30, Deluxe announced lower expectations for 2006, adding that it was taking a one-time $45 million pre-tax impairment charge. Management came to the realization that its attempt to integrate parts of its business under a single software suite would be futile. The market's reaction was swift, knocking an already ailing stock down from $21 to $14.

The rebound
Management hasn't reported any unwelcome news since then, although existing shareholders weren't overjoyed by the 37.5% dividend cut. Combine "no news is good news" with strong market action since August, and that same old Deluxe is now trading higher than $28.

The analysis
Nothing has changed; Deluxe is still fighting an uphill battle. Rather, the market showed how manic it can be. But while the double would have been great, I believe it would have involved some luck -- and not the kind of luck we need for long-term investing success. For a better double, this Fool suggests we can learn from reviews of the doubles of companies like C.R. Bard (NYSE: BCR  ) or Electronic Arts (Nasdaq: ERTS  ) , or even from the analysis of Intuit's (Nasdaq: INTU  ) almost-double.

For related Foolishness:

Electronic Arts is a Motley Fool Stock Advisor selection. You can find out why with a 30-day free trial. Intuit is a former Inside Value pick.

Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.


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