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Tuesday, January 20, 1998
Corporate Express
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Phone: 303-664-2000
Website: http://www.corporate-express.com
Price (1/16/98): $9 3/8
HOW DID IT FIND TROUBLE?
Eccentric chief executive officers have nothing on Jirka Rysavy. He came to the United States on a tourist visa in the early 1980s and is still every bit the wanderer. As a penniless Czech immigrant who grew Corporate Express into a billion dollar entity, the shrewd businessman leads a seemingly monastic private life -- living in a humble home on a wide acreage with no plumbing.
Then again, who needs conventional toiletry when Wall Street has flushed shares of Corporate Express down the drain. From a multi-millionaire who prefers the outhouse to the multitude of shareholders who are now in the doghouse, the perils of investing in a mature growth company in transition usually include a courtesy flush or two.
Acquisition hungry from the onset, Corporate Express now has to take time to digest. As it sets forth to invest in its own infrastructure, capping earnings growth in the short term, the slowdown at a company known for quick delivery was not welcome news to momentum investors looking for increased earnings growth.
BUSINESS DESCRIPTION
Billing itself as the "World's Corporate Supplier," Corporate Express provides same-day and next-day office supply delivery to companies with at least 100 employees.
The Colorado-based company operates in over 500 locations through 80 distribution centers, utilizing a fleet of over 10,000 delivery vehicles.
FINANCIAL FACTS
Income Statement*
12-month sales: $3762.7 million
12-month income: $37.4 million
12-month EPS: $0.27
Profit Margin: 1%
Market Cap: $1411.9 million
(*Pro forma, includes extraordinary charges)
Balance Sheet
Cash: $33.8 million
Current Assets: $1,041 million
Current Liabilities: $527.1 million
Long-term Debt: $744.4 million
Ratios
Price-to-earnings: 34.7
Price-to-sales: 0.38
HOW COULD YOU HAVE SEEN IT COMING?
Rysavy, a mathematical child prodigy back in Czechoslovakia, apparently loves multiplication by addition. The company has been buying up smaller players both here and abroad to fuel growth. With the thrifty Rysavy on board, the company has always paid fair prices on the acquisitions -- that was not the problem.
Back in March, shares of the company got stapled when it pre-announced lower-than-expected earnings. When the two following quarters showed a return to robust growth, investors got back on the Corporate Express elevator -- going up. However, the critiques by analysts at the time of the earnings shortfall should not have been dismissed so quickly. At that time Michael Rosen from Blackford Securities said that some of the company's acquisitions "were not thought out as well as they should have been."
On the surface, acquiring companies like United TransNet, the second-largest same-day local delivery service in the country, seemed logical, but the "significant synergies" Corporate Express had envisioned did not initially pan out. Who can argue the merits of buying customized business form maker Data Documents, Corporate's latest purchase back in November, or the dozens of others that preceded it?
Corporate Express now realizes that buying puzzle pieces does not always guarantee a perfect fit, and will spend the next two years investing in technology to make the big picture come together. The fact that the company plans to spend any earnings beyond 20% earnings growth on its retooling and branding program until the year 2000 has a short-sighted Wall Street hitting the brakes on Corporate Express and its growth over the near term.
An investor who figured that the disjointed acquisitions would eventually have to be addressed may have seen the recent tumble coming -- and not given in to the rally that occurred over the summer.
WHERE TO FROM HERE?
Can a Czech go Dutch? Last week Corporate Express announced a Dutch Auction where it will buy back 25% of its shares outstanding. Interested shareholders will submit a price between $10 and $11.50 at which they would like to tender their shares back to the company and the lowest priced 35 million shares will be repurchased.
Since the process is still a month away, the shares will probably not move much either way until the arbitrage play has run its course. While traditional share buybacks often have a favorable impact on downtrodden companies, now that a price range has been set and last Friday's one-day pop over, the next few weeks should be quite smooth.
Beyond that it becomes a tug-of-war. The bears can simply point to the slowdown in earnings growth. Now obsolete analyst projections for earnings to grow 40% per year over the next five years will be adjusted downward as the company is now looking at 25% annual growth over the next decade. The bulls can look at the current share price and see that it is cheaper than even the 20% projected growth that awaits in the investment-intensive days ahead might suggest.
Debt rating service Moody's may not like the auction. Corporate Express already has plenty of debt, and the extra $300 million isn't going to help its credit rating any. However, investors may want to consider the circumstances, and, like Rysavy himself, look past the drainpipe and to see what lies ahead.
-Rick Aristotle Munarriz
([email protected])
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