What's the Margin Trend at American Reprographics?

By Seth Jayson | More Articles
August 19, 2010 | Comments (2)

Margins matter. The more American Reprographics (NYSE: ARP ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong American Reprographics' competitive position could be.

Here's the current margin snapshot for American Reprographics and some of its sector and industry peers, and direct competitors.

Company	TTM Gross Margin	TTM Operating Margin	TTM Net Margin
American Reprographics	33.5%	7.3%	(5.7%)
FactSet Research Systems (NYSE: FDS )	67.3%	34.8%	23.4%
Daily Journal (Nasdaq: DJCO )	54.1%	31.7%	21%
Dun & Bradstreet (NYSE: DNB )	68.9%	27.5%	14.6%
IHS (NYSE: IHS )	57.4%	18.4%	14.1%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that chart doesn't tell us much about where American Reprographics has been or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for American Reprographics over the past few years.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

Over the past five years, gross margin peaked at 43% and averaged 40.5%. Operating margin peaked at 19.9% and averaged 16.8%. Net margin peaked at 12.2% and averaged 6.6%.
Fiscal 2009 gross margin was 35.5%, 500 basis points worse than the five-year average. Fiscal 2009 operating margin was 10.3%, 650 basis points worse than the five-year average. Fiscal 2009 net margin was -3%, 960 basis points worse than the five-year average.
TTM gross margin is 33.5%, 700 basis points worse than the five-year average. TTM operating margin is 7.3%, 950 basis points worse than the five-year average. TTM net margin is -5.7%, 1,230 basis points worse than the five-year average.
LFQ gross margin is 34.3%, 320 basis points worse than the prior year quarter. LFQ operating margin is 7.6%, 480 basis points worse than the prior year quarter. LFQ net margin is 1.5%, 330 basis points worse than the prior year quarter.

With recent 12-month-period operating margins below historical averages, American Reprographics has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at American Reprographics in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. FactSet Research Systems is a Motley Fool Rule Breakers recommendation. American Reprographics is a Motley Fool Hidden Gems selection. The Fool owns shares of American Reprographics. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Report this Comment On August 19, 2010, at 4:47 PM, czroman wrote:

Seth,
With all the respect for your investment expertise, which has been proven on a numerous occasions, I am going to play a „smart ass“ role here.
First of all, the companies listed as „industry peers and direct competitors“ are, in practice, none of the two. The fact is that ARP is in its own league, with none of its true competitors being publically traded. The companies listed by you may fall in the same general „industry sector“, but their cost structure, to the best of my knowledge, is completely different from that of ARP. The only publically traded competitor, in my opinion, is Service Point Solutions (SPS), listed at the Spanish stock exchange – but do not expect much of the benchmarking opportunity there, since the rules of the Spanish stock exchange vary greatly from the US ones and the accounting methodology is clearly different… To make the long story short, the reality is that it is near impossible to benchmark ARP‘s gross (or net, for that matter) margins with its TRUE competitors as most of them are a) much smaller and b) privately owned.
OK, now let’s look at the margin chart and the reality. As you show, the gross margin has been on a clear decline over the past few years. I have two comments on this topic.
- First, any gross margin north of 30% (or maybe single digits above 30%) is just great in the reprographics industry. Again, it is the matter of terminology and of what is included in the COGS, but ARP is doing really well in this category (assuming their cost structure includes all major cost items, mainly the equipment acquisition and service, materials, production occupancy cost and production labor, along with some smaller items…). If you look at SPS for the benchmark, you see numbers close to 70% for the gross margin – which clearly shows the methodology difference, because there is no way SPS can include all the costs I mentioned above and show this kind of gross margin – IMPOSSIBLE on a clearly comparable scale . So, we have a clear benchmarking issue here, but that should not push aside the fact that ARP’s gross margin (if structured „correctly“) is much better than that of the privately held reprographics firms (competitors) I know.
- Second, the cost structure in the reprographics industry lies pretty heavily on the fixed costs (equipment acquisition, occupancy cost, fixed service fees, production labor to a degree,…), with the only TRUE variable cost being the materials (paper, toners,…) and the service cost (most repro firms pay „click“ fees to service providers for every print made). As the result, once the revenues start dropping, your gross margin declines dramatically, since your true variable costs count only for about 20% of your sales, if not less. ARP has done a superb job cutting down the costs at the time of the economical decline – possibly even too much, that is just my opinion…
As for the SG&A expenses, the company has, once again, been able to decrease these in nominal terms, keeping the percentage value somewhere near 20%, which is probably fine in the US for the industry.
One very important notice here is that ARP, as much as it tries to diversify elsewhere, is heavily dependant on the AEC (architects, engineering, and construction) industry, which is typical for the reprographics firms in the US. What I am trying to point out here is that with the major revenue decline (due to the lack of its customer activity), the margins for the company MUST go down no matter what you do. What is actually worrying for me is the amount of cost cutting the company must have done in order not make things look even worse and keep the markets somewhat happy…which could cause some competitive issues in the future. Again, this is a cyclical industry and there is only so much one can do. ARP is not quite a manufacturing firm, but its cost structure is much closer to that than to a typical service provider… Therefore I would conclude that the shrinking margins you mention are much more connected with the industry cycle than with competition etc.
On another note, I must say that the current cycle is different from the previous ones for most US repro firms and I do not believe ARP’s US business will get „back to normal“ any time soon. I think that the high numbers of centrally produced paper sets and documents, so common in the US, are the history and will go away with the technological changes (decentralization, move to digital, printing only the drawings truly needed). It is my understanding that ARP is trying harder than anybody else to put their hands on the decentralized printing in the customer’s offices (so called „FM business“), because most customers still prefer their paper printouts over digital images… ARP is also heavily engaged in the document management and project management area, where many opportunities can be found - they have a heavy AEC customer base that trusts them and can be „milked“ for non-printing services… On top of all this, they are getting more deeply into the „non-AEC“ services, which can help them to utilize their staff and equipment and get some high margin revenue…
Whether they will succeed to do all of the above and return to the historical margins (and when this would happen, given the status of the US real estate market) is a different story – and I am certainly not brave enough to make any predictions here. However, they are well positioned to survive the current mess and possibly switch to a different (digital) track over some time – the only question being what this will do to their revenue and margin figures. Moving further to digital will improve the margins, but can hurt the revenues – so take your pick…
Respectfully,
Roman
i.e. czroman
Disclosure: I own ARP stock.
Report this Comment On August 25, 2010, at 4:36 PM, hymn4369 wrote:

Seth, All you thoughts and information are indeed enlighting and welcomed.That is if you are still working for this company.For which after 25 years in this industry and 5 years with ARP I am not. Angry? You BET. My hope is that (although it won't happen) ARP goes bankrupt. Oh,Seth when did you buy in.Inital IPO was $11.00,and at one time traded as high as $32.00.If you got in when the stock was around $3.00 you are doing well. But all ARP's acqusitions did was contribute the unemployement problems.The "click" fee you refer to is a fixed cost based on contracts with their major vendor OCE. But I came from the old school.Honesty and fort-rightness.Which this company's upper Mgt.does not have. Charging for "ghost" services,is kind of like the US govenmrnt paying $35.00 for a screw driver from its vendors is it not? Or like saying there's no AREA 51. Hope you and ARP fall flat on your butt.

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