Deluxe fails all of the main investment tests - growth, competitive moat, and financial strength - and as such I recommend that Magic Formula investors look elsewhere. Printed checks are in secular decline. In 2007, checks accounted for just 35% of all non-cash payments, well down from 45% in 2004, according to the Federal Reserve. Check volume has been declining about 4% annually this decade as an increasing number of consumers and businesses elect to pay their bills with credit/debit cards, and through online transactions. This leaves only cost cutting, market share gains, and acquisitions as growth avenues for Deluxe. Management has been trying to execute on all 3, cutting SG&A spending and closing a number of acquisitions to try and establish an Internet presence. However, revenue has declined at an annualized 4% since 2005, and there is little to suggest this trend will reverse itself.

Printed products are hardly a wide moat business, either. In check printing, Deluxe faces competition from large players like Harland-Clarke, as well as smaller printers both local and Internet-based, not to mention software programs that can print checks. Checks are losing the battle against new, electronic payment methods like credit/debit cards and online bill pay. Small business forms and stationary are likewise highly competitive. The corner office can elect to use the local print shop for it's needs, or head to Staples (SPLS), OfficeMax (OMX), or Office Depot (ODP). Deluxe does hold several 3-4 year contracts with large financial institutions, but with the turmoil in that industry, the company faces the risk of these customers being bought up by non-customers, or disappearing altogether. Otherwise, there are no switching costs, regulatory barriers, or unique assets, and scale does not really provide a major advantage. Also, printing is a business with low barriers to entry, meaning new competitors pop up all the time.