Consolidated Graphics, Inc. (CGX), a leading national provider of commercial printing services, reported fourth quarter EPS of $1.15, up 8.5% year-over-year, primarily due to the impact of share repurchases. The company's strategic sales initiatives continue to grow and its cash generation remains strong enabling it to invest in strategic acquisitions and new technology.
However, we expect decelerating sales and EPS growth in FY09 on weaker organic growth sales expectations. Applying a P/E multiple of about 11.5x to our FY09 EPS estimate, we derive a target price of $56.00 per share. With a total return potential of less than 10% from the current price, we maintain our Hold recommendation on shares of CGX.
CGX actively pursues multi-year printing contracts from large corporations. Another positive factor revolves around the development of value-added services through Consolidated Graphics CGXSolutions.
But CGX's large exposure to the U.S. commercial printing industry is worrisome. We are forecasting a global economic slowdown, which would negatively impact the company's growth rate.
At the current price, CGX shares are trading at 11.1x our FY09 EPS estimate of $4.87, which is at a discount to the industry median multiple but at a premium to its peer R.R. Donnelley & Sons Company ( RRD ). Historically, CGX has traded at a premium to its larger peer.
In a slowing domestic economy, though, we believe investors will reward large-cap names with a higher multiple over small peers. To reflect our concern about the economic slowdown and risks of margin expansion, we are forecasting decelerating sales and EPS growth in FY09.
