R.R. Donnelley Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Commercial printing magnate R.R. Donnelley & Sons (NYS: RRD) cratered 13% today on truly abysmal second-quarter earnings.

So what: Sales for the fiscal second quarter were actually up nearly 9% over last year's Q2, and pro forma earnings beat estimates by a penny. "Special items," however, hurt earnings so badly that when all was said and done, Donnelley ended up with just $0.06 per share in net profit -- down 86% from last year.

Now what: With Donnelley shares costing 26.5 times the now-depressed earnings, I can't really blame investors for fleeing the stock. After all, analysts only expect Donnelley to grow its earnings at about an 11% pace over the next five years, and the resulting 2.4 PEG ratio on this stock doesn't look at all attractive.

That said ... before you join the lemmings leaping off the cliff, I'd suggest you take a closer look at the cash flow situation here. CEO Thomas Quinlan tells us sales have been "firming up ... over the past month or so," giving him confidence that business will turn around in H2. Indeed, Quinlan promises Donnelley will generate "approximately $600 million" worth of free cash flow by year end. With a market cap of only $3.3 billion today, that makes for a very attractive P/FCF valuation on the stock. And even factoring debt into the mix, I put Donnelley's enterprise value at just 11.5 times free cash flow. Between the growth rate and the monster 5.6% annual dividend yield, I think that makes Donnelley a bargain.

In short: If you haven't already sold, think twice before doing so. This stock is a whole lot cheaper -- and more profitable -- than it looks.

Willing to give R.R. Donnelley some time to prove itself?Add it to your Fool Watchlist.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of R.R. Donnelley. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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