We have an Outperform rating on R.R. Donnelley & Sons Company (RRD), a leader in the commercial printing industry. We have set a price target of $25.00.

R.R. Donnelley is currently trading at 13.5x our 2010 earnings estimate of $1.65, a discount to the industry average. The company’s current trailing 12-month earnings multiple is 12.5X, compared to the 14.1X average for the peer group and 28.3X for the S&P 500.

R.R. Donnelley is the largest printing company in the U.S., providing various global printing services to a wide variety of businesses worldwide, as well as related services such as logistics and distribution for print customers and mailers.

Third-quarter results beat Zacks Consensus Estimates. Revenue growth should pick up by 2011 as the recession blows over and demand gains momentum. Meanwhile, cost-containment efforts will improve margins and leverage growth in earnings.

Management expects sequential revenue growth in the fourth quarter in the low single digits. Non-GAAP operating margin is expected to be between 125 – 175 basis points lower than the third quarter of 2009 due to the absence of some of the third-quarter benefits. Free cash flow is expected to exceed $1 billion for 2009.

The company’s aggressive acquisition policy, debt repayment initiative and an attractive regular dividend payout (5% yield) are other positives. In our opinion, RRD has sound fundamentals and a number of competitive advantages which have enabled it to generate impressive cash flow. Thus we remain positive on RRD’s long-term value for investors.

However, while the economy is on the mend, printers typically lag a recovery. Additionally, the highly leveraged balance sheet and integration related risk are a concern. R.R. Donnelley’s major competitors include Dai Nippon Printing, Toppan Printing and World Color Press.

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