Deutsche Bank Lowers Their Price Target on Valassis Communications (VCI) to $16; Maintains Buy
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Deutsche Bank lowers their price target on Valassis Communications (NYSE: VCI) from $18 to $16 but maintains their Buy rating.
While industry FSI volume trends were slightly softer than expected in 2Q, the firm believes that VCI will maintain positive revenue growth despite the softening overall US ad market due to the relative stability YTD of promotional media (and VCI's shared mail market share gains). The firm maintains their buy rating due to "the profit upside from ADVO and the attractive relative and absolute valuation" but lowers their price target due to contracting media multiples.
The firm estimates FIS industry volume decline 4% in Q2. However, the firm also highlighted that FSI industry volumes, down only 1% in the first half, “is no worse than last year (1H07 and '07 each -1%) and demonstrates advertisers' reluctance to cut consumer marketing investments in the midst of economic softness.” Despite the weaker-than-expected volume, the firm makes no change to their 2Q FSI revenue forecast of -8.0% (volume -3%, prices -5%, share erosion), and their second half forecast of -6% (assumes flat volume).
Moreover, the firm said, "The biggest thing holding back the stock seems to be the market's worry about a $15-20m paper ‘problem.' Given the caps & collars, we think the paper price increases are manageable in '08, barring a material weakening in advertiser spend driven by the economy or customers' own cost pressures, as some supply their own inserts. As for '09, VCI should offset paper costs by passing through postage, containing printing, and cutting media & SG&A, leaving a stable overall cost base."
Valassis Communications, Inc. provides various marketing services to consumer packaged goods manufacturers, retailers, technology companies, and other clients in the United States and internationally.
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