We recently hosted investor meetings with ARC CFO John Toth and Vice President of Investor Relations David Stickney. We continue to believe that the company is headed in the right direction toward driving better top-line growth and will benefit from operating leverage as growth picks up. The company is working to becoming a larger, full-service content management provider capable of handling any kind of document for all parts of its life cycle after initial creation.
The majority of investor questions focused on understanding the drivers of the company’s document management strategy and the connections between ARC’s legacy role (printing large-format and color documents) to the new role of managing a company’s print infrastructure.
Investors looking for a large inflection in growth as a result of a recovery in nonresidential construction will probably be left wanting, but investors who underestimate the growing influence cross-selling will have on growth and margins will likely be unhappy if they do not own the stock for the next couple of years. At 6.3 times our 2015 adjusted EBITDA estimate, the valuation is on the relatively inexpensive side versus what we believe the business model’s predictability and cash flow conversion should warrant, but understandable given trading liquidity, some confusion about the different service lines (competitive moat, value added), and investor perception of ARC’s revenue growth profile. The main question for us relative to the rating and the stock is a catalyst. While we recognize that hitting numbers is and will be important for investors (and thus the multiple), we are not sure what else convinces the market that the business is more defensible, more predictable, or has more operating leverage than it currently has. We maintain our Market Perform rating as we search for a catalyst and/or a large enough pullback in the multiple to revisit our stance on the stock.
We had not updated our 2014 and 2015 estimates following first-quarter earnings, so our new estimates are as follows.
Our 2014 revenue growth estimate remains relatively unchanged at 3.1%, to $419.8 million, with adjusted EBITDA also basically unchanged at nearly $69 million (16.4% margin), compared with management’s guidance of $69 million to $73 million. Our adjusted EPS estimate moves slightly higher to $0.23 from $0.22, driven by slightly less interest expense than previously modeled. Management’s guidance for adjusted EPS is $0.19 to $0.23.
Our 2015 estimates also remain virtually unchanged: revenue growth of 4.3%, to $437.8 million; adjusted EBITDA of $75.2 million (17.2% margin); and adjusted EPS of $0.35.