Deluxe stock slowly crawling out of crater

Deluxe Corporation's stock is slowly crawling out of the crater created July 31, when the company missed Wall Street's expectations for the second quarter and lowered its guidance for the year, sending the stock crashing 26 percent.

Shares of the Shoreview-based check printer and small-business forms and services firm hit a 52-week trading low of $14 a share, far from its $40.86 per share high in October.

"We are disappointed with our revenue performance in the quarter and certainly are not immune to the challenging economic conditions," CEO Lee Schram told investors recently.

"Despite these conditions, we remain optimistic about the continued transformation of Deluxe."

Possibly investors do, too.

While total revenue fell 8 percent during the quarter, Deluxe's stock price is creeping back. It rose $1 on Tuesday and closed at $16.60 on Thursday, as investors gnawed on management's latest turnaround plan, which is packed with e-commerce acquisitions and test projects. The stock gained 97 cents on Friday, ending at $17.57.

Deluxe is battling the downward trend in check writing, pricing pressures from once stalwart bank partners and an economy that has many consumers and small businesses tightening their purse strings and postponing office improvements and fresh inventory orders.

Deluxe's small-business revenue, once hailed as the solution to its declining check orders, failed to save the recent quarter, as it sank $18.6 million lower than the previous year because of "economic softness," company officials said.

Going forward, Schram pledged to slash $225 million in costs, continue strategic price increases and integrate several small acquisitions that are expected to broaden customer service offerings, bump cross-division sales and diversify the company's revenue stream.

The company just launched a ShopDeluxe e-commerce website and completed several small acquisitions, including market intelligence firm PartnerUp, Web services firm Hostopia, logo design firm Logo Mojo and the commercial printing and bookbinding firm Johnson Group.

Deluxe also piloted an employee background-screening service called HireRight for small-business customers. Deluxe officials say the company has about 4 million small-business customers who can be introduced to the new services.

Schram told investors that the recent deals should "begin to shift our portfolio from traditionally mature, print-related markets in decline to business-services markets that are growing." Hostopia alone is expected to grow 20 to 24 percent in fiscal 2009, he said.

Some remain skeptical.

Beth Lilly, a Gabelli Woodland Partners portfolio manager, questioned management's top-line revenue growth goals.

"It is interesting for this first quarter [that] your revenue declined 8 percent. And on a year-to-date basis, they are down 7 percent. So you are talking about a pretty dramatic reversal," Lilly recently told Schram. "Yet, you are telling us that you think longer term you can grow mid-single-digit. So we are having a hard time bridging that gap."

Sidoti & Co. analyst Jamie Clement said, "Obviously the stock's been down, and it is down an awful lot. What probably scares investors here is that you are talking about a potentially huge organic decline that has occurred over the last 18 months."

Clement said the costs associated with fresh corporate investments will fade over time, but that Wall Street may not be factoring that in.

Longbow Research Analyst Atin Agrawal said short-term investors will remain mired in Deluxe's bad quarter, while long-term investors may see the end of the tunnel.

"You can see the trading shot up" last week, Agrawal said. "The play here is with the people who are bearish. They are seeing that, even with these new services, [results] won't turn around in the short or near term -- say, in the next two quarters. But long-term investors' orientation is different, and they are definitely seeing a lot of value in Deluxe."

Longbow Research remains neutral on the company. "But for long-term and patient investors, this is definitely a good entry point into the stock," Agrawal said.

Schram said company officials "absolutely believe [that] sooner rather than later ... we can start getting some top-line growth."

By bringing acquisitions together during the second half of the year, revenue will expand, Schram said. "Synergistic capabilities [will] bring them along. Obviously we would not have done them if we did not think these things were going to help us a lot," he added.

The company recently revised its 2008 revenue expectations to $1.52 billion to $1.54 billion, down from the $1.56 billion to $1.59 billion it had forecast in April.

Dee DePass • 612-673-7725