Marketing solutions expert Quad/Graphics (NYSE:QUAD) reported its fourth-quarter results after the closing bell on Tuesday. The company smashed Wall Street's earnings estimates to smithereens thanks to more effective manufacturing processes and disciplined expense controls. However, analysts' expectations had been set incredibly low, so Quad has a lot of work left to do before it can legitimately be called a turnaround story.

Quad/Graphics' fourth-quarter results

Metric

Q4 2019

Q4 2018

Change

Analysts' Consensus Expectation

Net sales

$1.07 billion

$1.12 billion

(4.9%)

$1.02 billion

GAAP net income

$7.5 million

($21 million)

N/A

N/A

Adjusted earnings per share (diluted)

$0.38

$0.72

(47%)

$0.03

Data source: Quad/Graphics. GAAP = generally accepted accounting principles. All listed metrics are for continuing operations only.

The company is knee-deep in a strategic shift under the banner of Quad 3.0. After digesting a number of acquisitions over the last decade, Quad is now focusing on cross-platform marketing services supported by its printing operations.

As part of this strategic shift, it's looking to sell its book-printing business, which has been an underperformer in recent years. Quad  found a buyer for its heavy-duty wood crating business in September, and industry peer Graphic Packaging International (NYSE:GPK) bought its packaging plant in Omaha, Nebraska, in January. Because adjusted earnings explicitly exclude funds from discontinued operations, the GAAP results listed above factor out the contributions from those units, reducing the revenue figure by roughly $50 million and the bottom line by $1 million. Quad is using the proceeds from these sales to pay down debt.

The Quad 3.0 plan included approximately $50 million in annual cost-cutting efficiencies. The company doubled that target to $100 million per year. The effects will be immediate, boosting the bottom line for fiscal 2020. Management is forecasting adjusted EBITDA profits (earnings before interest, tax, depreciation, and amortization) of roughly $300 million, compared to $335 million in 2019.

A young businessman glares at the camera, holding a lighter in one hand and a burning piece of paper in the other.

Quad/Graphics is on fire today, but maybe not in a good way. Image source: Getty Images.

The market reaction

Investors were quick to embrace Quad's solid results. The stock jumped 23% in after-hours trading Tuesday, and held firm at that level in Wednesday's pre-market action.

Mind you, that's a rebound, not a skyrocketing takeoff. Even at these prices, Quad's stock is still 55% below where it was trading the night before its ugly third-quarter report in October. The printing industry is not a hospitable place to do business these days, and while Quad should be applauded for taking firm action to refocus itself on a more profitable multiplatform marketing strategy, that journey has only just begun.

After this week's sharp recovery, Quad's shares are trading at 0.08 times annual sales or 10.5 times adjusted earnings. The effective dividend yield stands at a generous 9.7% -- even after management slashed the dividend in half three months ago. Adventurous investors might want to pick up some Quad shares on the cheap, and keep their fingers crossed for a successful recovery. But that's really more of a gamble than an investment and I don't recommend taking the plunge today.