What happened

Shares of Quad/Graphics (QUAD 2.66%) had risen 23.9% this week as of 2:41 p.m. EDT Friday, according to data from S&P Global Market Intelligence.

Quad can probably safely be called a deep value stock, having been beaten down due to the company's debt load and pessimism over the long-term future of its physical print business. However, its fourth-quarter earnings report, released this week, showed solid profitability thanks to the pivot to become a marketing and advertising agency service provider.

So what

You might not have heard of Quad, a company with a market cap of just $276 million. Furthermore, there are a grand total of zero Wall Street analysts covering the company. However, underfollowed small caps can sometimes yield the biggest surprise outperformance, given their lack of attention and often cheap valuations.

While the lack of analyst coverage means there were no expectations heading into this week's fourth-quarter earnings report, Quad's results apparently encouraged its buy-side shareholders. Revenue came in at $885 million, up 4% from a year ago. While the company recorded a net loss, thanks to restructuring and amortization of intangible expenses, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 32% to $79 million.

For the full year 2022, Quad reported 11% growth and $94 million in free cash flow. That makes the stock extremely cheap, at just 3 times free cash flow.

Why so cheap? Two reasons. First, investors might worry about how an economic downturn will affect advertising and marketing spending, as well as Quad's exposure to physical printing, which is probably in long-term decline. Second, Quad also has a fair amount of debt, at $545 million -- about 2 times the company's market cap.

Still, the company gave encouraging guidance for 2023 that might have allayed those fears. Management predicts 0% to negative 5% revenue declines in 2023, with resilient adjusted EBITDA between $210 and $250 million and free cash flow between $50 million and $90 million.

Positive cash flow, even in an economic downturn, should enable the company to continue paying down debt, which Quad has impressively reduced by 47% over the past three years. By the end of 2023, the company expects to pay off more debt, reaching its 2-times leverage target and achieving a 55% debt pay-down since January 1, 2020.

Now what

As long as Quad can continue generating cash flow and paying down debt, the stock looks quite cheap indeed. While investors should remember that the company's physical printing division is likely to decline, physical catalogs, retail inserts, directories, and signage probably aren't going to completely disappear. Moreover, the company's services division, which offers turnkey marketing and analytics solutions, though a smaller part of the business mix, should be less volatile.

Of note, famed value investor Bill Miller's Miller Value Partners is a shareholder, with 3.7% ownership as of the end of last year.