ARC Document Solutions: A Great Opportunity To Capitalize On Construction Normalization

npressfetimg-524.png

Alex Potemkin/E+ by way of Getty Pictures

ARC Doc Options has been altering its focus into turning Proper into a quantity one document solutions agency. The enlargement of its consumers, the surging demand for scanning, and the return to the office will all current vital alternatives for The agency. We’re initiating with a Buy rating and a $5.25 worth goal.

Knowledge by YCharts

Funding Thesis

  • ARC is altering its focus from An group focused on the Architectural, Engineering, Enchancment and Constructing Proprietor/Operator (AEC/O) enterprise Proper into an group That currents document solutions for all industries. This alteration will current vital progress alternatives.
  • A return to A bit/hybrid environment will enhance demand for digital printing, managed print providers, and document scanning providers.
  • ARC’s legacy construction printing enterprise will develop as construction returns to a extra regular environment.
  • Administration is making A strong effort to return worth to their shareholders. ARC has enhanced the quarterly dividend to $0.20 yrly (presently a 5.6% yield) and has furtherly proceedd the inventory purchase program.
  • ARC is underworthd and trades at 18.8 events our FY:21 EPS of $0.19 and solely 14.9 events our FY:22 EPS estimate of $0.24. Our worth goal Is predicated on a conservative 20 events FY:22 PE Valuation mixed with our DCF mannequin worth.

Primary Risks

  • ARC Is very Counting on the Architectural, Engineering, Enchancment, and Constructing Proprietor/Operator (AEC/O) enterprise. This group accounted for 69% of gross sales in FY:20. A decline On this enterprise might adversely have an effect on future income and revenueability.
  • Future restrictions Launched on by COVID-19 would have a adverse influence on The agency’s outlook.

Funding Thesis

ARC currents digital printing, seen communications, and document scanning providers to Pretty a Little bit of industries, collectively with the education, well beingcare, journey, oil, eating places, sports activities, leisure, and construction industries. The Company started Inside the late Nineteen Eighties and went public in 2005 As a Outcome of the Most very important reprographics agency (i.e. blueprinting) Inside the nation. Earlier than 2012, The agency’s identify was American Reprographics Company. Since 2008’s Good Recession, the digitalization of paper paperwork has decimated the enterprise, eroding incomes. In consequence, The agency Needed to adapt and Reply to various market challenges. As a Outcome of the third quarter of 2019, The agency has been shifting from one focused on the AEC/O enterprise into One which currents A numerous set of document solutions for all industries. Their Services embrace digital printing providers, enterprise printing solutions, enterprise management providers, technical printing solutions, know-how solutions, scanning solutions, gear currents solutions, and Computer software.

ARC parts their enterprise into 4 divisions: Enchancment Doc Information Administration (“CDIM”) or Digital Printing, Managed Print Services (“MPS”), Doc Scanning & Imaging or Archive Information Administration (“Purpose”), and Equipment and Supplies.

CDIM or Digital Printing consists of expert providers and Computer software providers To breed and distrihowevere huge-format and small-format paperwork and both black and white or colour and specialised prints. CDIM has A numerous group of digital printing solutions Which inagencys environmental graphics, retail graphics, event and tradecurrents, signage, supplies prints, and again To Highschool safety graphics.

Managed Print Services consists of placement, management, and optimization of print and imaging gear in clients’ workplaces, job web websites, and completely different amenities. The service relieves The agency’s clients of the burden Of buying for print gear and associated currents and sustaining print mannequins and print internetworks, and it shifts their prices to a “per-use” basis. Purpose or Doc Scanning & Imaging mixs Computer software and expert providers to facilitate the seize, management, entry, and retrieval of paperwork And information Which have been produced Prior to now.

The gross sales mix has modified over time, however as of The Latest quarter, the gross sales mix was:

CDIM 61.93%

MPS 25.52%

Purpose 5.66%

Equipment and Supplies 6.90%

Our thesis is that ARC Doc Options is an underworthd, compelling Company Which might ship worth for shareholders because:

  • ARC is altering its focus from An group focused on the Architectural, Engineering, Enchancment and Constructing Proprietor/Operator (AEC/O) enterprise Proper into an group That currents document solutions for all industries. This shift will current An monumental progress alternative for The agency.
  • A return to A bit/hybrid environment will enhance demand for digital printing, managed print providers, and document scanning providers.
  • ARC’s construction printing enterprise will develop as construction returns to a extra regular environment.
  • Administration is making A strong effort to return worth to their shareholders. ARC has enhanced the quarterly dividend to $0.20 yrly (presently a 5.6% yield) and proceeds a inventory purchase program.

We provoke safety with a Buy rating and a $5.25 worth goal.

ARC Transforming into a Digital Printing Company

ARC has begun An monumental Become turning Proper into a numerous digital printing and document solutions agency. In the Third quarter of 2019 (simply before the pandemic), they started an aggressive pivot To paint print providers and transferd away from the legacy enterprise Specializing in the Architectural, Engineering, Enchancment and Constructing Proprietor/Operator (AEC/O) enterprise. ARC’s want To maneuver away from their legacy enterprise Is apparent from their internet website. Whereas the AEC/O enterprise nonethemuch less accounted for 67% of gross sales for The primary 9 months ended September 2021, Based mostly on The agency, solely about 25% of income Is said to digital plan printing, while Prior to now, this quantity was nearer to 80%.

On their internet website, The agency extremelights their printing solutions, document scanning, know-how solutions, and gear currents. Beneath printing solutions are eleven packages which embrace colour printing and technical printing. “Reprographic Printing Options” is “hidden” under the class “technical printing.” Reprographics stays under The very biggest enterprise line which Acknowledged as CDIM. CDIM gross sales have stayed flat as reprographics gross sales have fallen while CDIM gross sales excluding reprographics have risen.

Starting the transformation Inside the Third quarter right before the pandemic has muted The agency’s progress however On The identical time has currentd some alternatives. ARC developed enterprise halfners and relationships Via the pandemic when completely different rivals have been closed. The Company furtherly currentd Back to School Safety and COVID19 graphics Via the pandemic and would have been much less More probably To start out this transformation if The agency had not begun the pivot To paint providers. Still, as quickly as the financial system is absolutely open and extra people return to the office setting and halficipate In further events, there Shall be extra alternatives for colour print providers in office buildings, events, conferences, and retail.

Return to the Office/Hybrid Environment Provides Opportunities for Growth

All through the pandemic, there was much less demand for paper providers and paper advertisements. Color printing providers clearly revenue from the return to the office and hybrid environment. The completely different enterprise divisions of ARC Can furtherly revenue from a extra regular environment. Clearly, the Managed Print Services (MPS) enterprise would current progress in a return-to-work environment. MPS consists of placement, management, and optimization of print and imaging gear in clients’ workplaces, job web websites, and completely different amenities. MPS relieves The agency’s clients of the burden Of buying for print gear and associated currents and sustaining print mannequins and print internetworks, and shifts prices to a “per-use” basis. All through the three months ending September 30, 2021, gross sales On this division enhanced as a Work at house directive ended for some clients. This division Would undoubtedly revenue from a return to the office environment.

The Archive or Information Administration (Purpose) or Doc Scanning & Imaging would furtherly revenue from a return to the office and hybrid environment. All through the quarter ending September 30, 2021, gross sales On this division rose $1.2 million or 40% as much less staff have been working solely from house.

Employees are much less More probably to make the most of print and scanning providers In the event that they’re working from house. As staff Return into the office, this change Shall be a progress alternative for ARC.

An monumental Portion of ARC Industry is Tied to Enchancment Industry And might Take pleasure in Enhancements in Enchancment Industry

The development enterprise has been significantly influenceed by COVID-19 and proceeds To regulate to ongoing shocks from COVID-19 variants. In 2020, complete construction starts fell 10% to $766.3 billion. As contractors Dealt with much less work, Additionally they Needed to spend money To shield staff’ well being and safety. Employers spent A imply of $5,200 per worker on COVID-19-associated safety. As the construction enterprise rebounded in 2021, contractors Needed to Deal with further shutdowns, enhanced prices of hiring, rising prices, disruption in logistics, current chain factors, resistance to protocols, and the fixed uncertainty that COVID-19 has triggered.

These COVID-19-associated factors have influenceed ARC as 67% of its enterprise is tied to the Architectural, Engineering, Enchancment and Constructing Personal/Operator (AEC/O) enterprise. Not surprisingly, gross sales have been down considerably Via The start of the pandemic and The agency’s inventory fell under $1. As The agency shifts gross sales to completely different industries and the construction enterprise return to a extra regular environment, we think about ARC will expertise vital tailwinds.

Administration Making a Push to Return Value to Shareholders

ARC talked about Inside their Q3:21 earnings name that “our dedication to return shareholders worth is as extreme As a Outcome of it’s ever been.” ARC has enhanced the dividend to $0.20 a share for the yr which equates to a 5.6% yield. The Company furtherly has proceedd a share purchase program and has purchased 4.5 million shares or about 10% of the shares excellent since 2019. All through The Latest quarter (Q3:21), The agency spent a mixd $1.4 million on share repurchases Inside the open market and dividends.

Administration and Shareholders

Suri Suriyakumar co-based ARC in 1989. He has served as ARC’s President and Chief Authorities Officer since 2007 and was appointed Chairman of the Board of Director in 2008. He served As a Outcome of the agency’s President and Chief Working Officer from 1991-2007.

Exhibit 1: Key Shareholdings – Insiders and Institutions

Primary Shareholders (ARC Doc Options and Singular Evaluation)

Q3:21 Monetary Outcomes

ARC’s third quarter Outcomes for FY:21 conagencyed a internet gross sales enhance of 0.1% to $72.43 million which As in contrast with Q3:20 gross sales of $72.38 million. Cash & money equivalents On The prime of the third quarter have been $54.9 million.

The Company commented, “We expertised persevering with demand in environmental graphics and colour printing of All varieties, As properly as To will enhance Inside The quantity of document scanning. Sales from the construction half furtherly stayed strong regardmuch less of considerations over current chain and labor constraints. We stay assured that our portfolio of providers appeals to a broad differ of enterprise varieties and will proceed to create alternatives and drive progress into the 4th quarter and subsequent yr.”

Architectural, Engineering, Enchancment and Constructing Home owners/Operators (AEC/O) accounted for about 67% of complete gross sales although The agency commented that new gross sales are dominated by work outdoors Of these industries.

For the quarter, Enchancment Doc and Information Administration (CDIM) gross sales decreased 4.7% As in contrast with the prior yr. The yr-over-yr decrease was As a Outcome of of lowered demand for graphic printing associated to the COVID-19 pandemic, halfially offset by gross sales of completely different digital printing. Managed Print Services (MPS or document scanning and imaging) enhanced by 4.8% as many returned to work, Ensuing In further Of these providers carried out on-website. Archiving and Information Administration (Purpose) gross sales enhanced 40% yr-over-yr. The return to work and hybrid work triggered greater want for scanning. Equipment and currents gross sales enhanced by 5.5% yr-over-yr. This enhance was associated to an enhancing financial system and a widespread transfer again to the office.

EPS Steerage and Estimates

Whereas The agency Does not current forecasts since the COVID-19 pandemic, management has said That they are assured in producing A minimal of $10 million in advertisementsimplyed EBITDA per quarter for the stability of the yr. They furtherly talked about Inside the earnings name that seasonal tendencies Will not play as huge of A process as they did beforehand and that demand for greater seen communications, extra entry to paperwork And information, and the pent-up demand for the aggressive journey retail season are More probably To enhance enterprise in This fall greater than ever before.

We anticipate 4th quarter gross sales to be up about 3% from final yr to $66 million. This forecast is conservative As a Outcome of it assumes that gross sales Shall be down about 8% sequentially. For FY:21, we anticipate gross sales to be down 7% to $269 million from $289 million in FY:20 and to rise in FY:22 by 4.6% to $282 million. We forecast $8.2 million in internet income for FY:21 and $10.1 million in internet income in FY:22. These forecasts Finish in internet earnings per share in 2021 and 2022 of $0.19 and $0.24, respectively.

Funding Risks

  • ARC Is very Counting on the AEC/O enterprise. Whereas ARC has tried to diversify the industries of their consumers, The agency Is very Counting on the Architectural, Engineering, Enchancment and Constructing Proprietor/Operator (AEC/O) enterprise for a lot of their gross sales. This group accounted for 69% of gross sales in 2020. We anticipate Finally that this proportion will decline over time. Neverthemuch less, over The subsequent few yrs, a decline On this enterprise might adversely have an effect on future income.
  • COVID-19 restrictions might return. ARC has revenueed as staff have returned to work. The want for colour prints, managed print providers, and document and scanning imaging Can be lowered if restrictions have been lifted and the work-from-house environment was to return.

Valuation

ARC Doc Options, Inc. trades at 14.9 events our 2022 EPS estimate of $0.24 and 14.3 events our 2023 EPS estimate of $0.25. As proven in Exhibit 2, these ratios are decrease than their common competitor. We worth ARC using a mixed valuation methodology the place we mix 50% of ARC’s worth goal to relative P/E ratios and the completely different 50% to ARC’s Discounted Cash Circulate (DCF) mannequin displayed on Website 12.

In our relative valuation, we assume a extra affordable however nonethemuch less conservative forward P/E of 20. This conservative valuation Leadvertisements to a worth goal of $4.80.

In our DCF mannequin, we estimate the agency would earn a return on capital of simply 10%, reinvesting 20% of this return into their enterprise and rising after-tax operations by 2% over The subsequent seven yrs. We think about these assumptions are conservative with ARC’s vital progress alternatives. These assumptions Result in a DCF worth goal of $5.80.

We then equally mix the relative valuation goal, $4.80, and the DCF valuation worth goal, $5.80, To current a final goal worth of $5.25.

The exhibit under summarizes our peer group multiples.

Exhibit 2: ARC Doc Options Versus Other Office, Service and Supplies Corporations

Peer Multiples (ARC Doc Options and Singular Evaluation)

npressfetimg-3336.png
construction

Construction ahead: Major road and water work planned for South Main Street

By JAN LARSON McLAUGHLIN 

BG Independent News

Bowling Green City Council…….

Read More
npressfetimg-3335.png
construction

Denver Begins Construction of Second New Security Checkpoint

Denver International Airport (DEN) has officially begun construction of the second new security…….

Read More
npressfetimg-3332.png
construction

Construction ahead: Major road and water work planned for South Main Street

By JAN LARSON McLAUGHLIN 

BG Independent News

Bowling Green City Council…….

Read More