Asymmetric setup with a potential 75.44% annual return.
Quad currently sees itself as a defensive stock in the eyes of the market. This can be seen in how investment research firms like Zacks and Barrington Research view QUAD as an outperformer and an efficient stock. Efficient stock means that the company has the capability to transform available input into output and is often considered an important parameter for gauging its potential to make profits. A company with a high-efficiency level is expected to provide stellar returns as it is believed to be positively correlated with price performance. However, at times, it becomes difficult to measure the efficiency level of a company. As such, we can utilize efficiency ratios to measure its potential efficiency. These are the following:
Receivables Turnover: This is the ratio of 12-month sales to four-quarter average receivables. It shows a company’s potential to extend its credit and collect debt in terms of that credit. A high receivables turnover ratio, also known as the “accounts receivable turnover ratio” or “debtor’s turnover ratio,” is desirable as it shows that the company is capable of collecting its accounts receivables or that it has quality customers.
Asset Utilization: This ratio indicates a company’s capability to convert assets into output and is thus a widely known measure of efficiency level. It is calculated by dividing total sales over the past 12 months by the last four-quarter average of total assets. Like the above ratios, high asset utilization may indicate that a company is efficient.
Inventory Turnover: The ratio of the 12-month cost of goods sold (COGS) to a four-quarter average inventory is considered one of the most popular efficiency ratios. It indicates a company’s ability to maintain a suitable inventory position. While a high value indicates that the company has a relatively low level of inventory compared to COGS, a low value indicates that the company is facing declining sales, which has resulted in excess inventory.
Operating Margin: This efficiency measure is the ratio of operating income over the past 12 months to sales over the same period. It measures a company’s ability to control operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.
These ratios are widely used and recognized by investment firms to make these convictions. Zacks and Barrington both support this conviction. Some background on Quad Graphics or QUAD:
Quad Graphics is a provider of print and related multichannel solutions for consumer magazines, special interest publications, catalogs, retail inserts and circulars, direct mail products, books, and directories. QUAD has an average four-quarter earnings surprise of 71.8%.
Now looking at QUAD’s financials, we have seen quarter-over-quarter net margins and income increasing steadily, whilst this first quarter of 2025 having a negative cash flow of \$100 million and an increase in their debt. As such, QUAD is providing a dividend payout of 3.84%. Their increased debt and negative cash flow is attributed to the following: On April 1, 2025, Quad acquired the co-mailing assets of Enru, a third-party co-mail and logistics solutions provider. The acquisition was structured as \$16.3 million in cash at closing, with an additional \$2.0 million due later in 2025, and a potential earn-out of up to \$16.0 million over five years, contingent on meeting financial targets. This strategic move aimed to enhance Quad’s capabilities in postal optimization and logistics. Regarding its seasonal cash flow patterns, as stated by investing.com: Quad's business exhibits seasonal cash flow patterns, with the majority of free cash flow generation and debt reduction typically occurring in the fourth quarter. The first quarter often reflects higher working capital requirements, leading to temporary increases in net debt. Despite the Q1 increase in net debt, Quad remains focused on its strategic transformation into a marketing experience company, investing in innovative offerings and optimizing operations. The company reaffirmed its full-year 2025 guidance, projecting adjusted EBITDA between \$180 million and \$220 million, and free cash flow of \$40 million to \$60 million. Quad aims to reduce its debt leverage ratio to approximately 1.5x by year-end.
Currently, QUAD sits at a low 6.66 P/E ratio, which is cheap, with growth for 2025 projected at 4.71. QUAD also currently sits at a short float interest of 5.04%, indicating market confidence in their ability to grow. From a technical standpoint, we have seen QUAD sit in an accumulation pattern from July 2023 until November 2024, seeing it finally shoot up to its price target at the time of 9.34. We have now seen it regress back to a strong point of support from the past 3-4 years at 4.48. When the reciprocal tariffs were announced, the stock maintained and respected that level, which is a good sign, indicating that if we were to see another downturn, we could expect the level to hold.
Considering the points made above, we look to enter at 5.70 and look to get out around 10, giving us a 75.44% potential return.
