Securities and Exchange Commission (SEC) compliance leader Donnelley Financial Solutions (DFIN -2.45%) recently reported second-quarter earnings that show marked advancement in its attempt to transform its stodgy, old-school investment and corporate clients into its software solutions. But are shares attractively valued?

Market dominance

Last week, Donnelley reported solid second-quarter numbers that revealed a 14.5% jump in adjusted earnings per share to $1.42. Management attributed the increase to structural cost reductions and growth in higher-margin software revenue. The company experienced 12.7% growth in compliance software and 7.5% growth in its software solutions business over the second quarter of last year.

Though it should be noted that revenue was down 0.5% overall. Donnelley provides compliance, record-keeping, and legal services to the mergers and acquisitions (M&A), initial public offering (IPO), and capital markets transaction industry. The earnings reported pointed to a substantial reduction in transactions due to the dying special purpose acquisition company (SPAC) boom that Donnelley gladly served in last year. Despite revenue from capital markets being down 22% from a robust second quarter last year, Donnelley outperformed its competitors.

Two people shaking hands to close a business deal.

Image source: Getty Images.

Part of the reason for Donnelley's outperformance in the slowing capital markets is its market share leadership. On its earnings webcast, Donnelley management said its pipeline for mergers and IPOs remains full, but deals are being pushed out due to macro uncertainty. Until those deals close and the majority of revenue is recognized, the company still performs services and collects revenue from each open deal.

Perhaps more importantly, Donnelley is one of the most trusted compliance companies in its markets. Therefore, the few deals that took place in the slow second quarter went to Donnelley.

Traditionally, Donnelley's compliance business consisted of paper-based disclosures, prospectuses, and client communications. Since the company has moved to a contemporary software-based platform, it has used its market share dominance to replace paper-based services and expand its software-based service to its extensive customer list.

In the second quarter, Donnelley's software sales reached $285 million, representing 30% of total sales for the company. That's a 480 basis point improvement from last year's second quarter. The company now has its sights set on achieving its goal of "44 in 2024," meaning it wants to get its software sales up to 44% of total sales by 2024.

Is Donnelley Financial stock a buy?

Despite a 10% pop in Donnelley's stock price after its earnings report, it is still down 10% for the year. According to Warren Buffett, price is what you pay; value is what you get. Determining the value of Donnelley stock is a bit tricky. For instance, in 2021, the company produced $4.14 in adjusted earnings per share. Based on the 2021 number, the shares trade at a trailing price-to-earnings (P/E) ratio of about 10 times, which appears attractive.

Investors should consider that Donnelley benefited from a once-in-a-lifetime SPAC boom, and 2021 earnings per share was the highest as a stand-alone public company. As a somewhat cyclical company, its valuation should consider all the highs and lows. Over the last eight years, Donnelley has averaged $1.72 in earnings per share, which would mean shares are trading at a distinctly higher normalized P/E ratio of 24 times. Donnelley stock has a five-year average P/E ratio of 9.7 times.

Even though Donnelley Financial's compliance business may be one of the more boring ones, it checks all the boxes of a fantastic company. However, shares look pretty expensive at this point. According to Buffett's dictum, you might not be getting enough value for the price.