When I go to a store to buy any consumer product, it is usually the packaging that catches my attention amid the visual clutter. Schawk, Inc. (NYSE:SGK), is a brand development company which designs the graphics used in consumer products packaging, and helps its clients capture the attention of shoppers. Schawk provides its customers with critical services that drive the final purchasing decision. The stock is attractively valued with a forward P/E of less than 10 and a decent dividend yield of 2.60%.
High customer value relative to cost
According to an OgilvyAction survey, 70% of shoppers make purchasing decision in the stores. You may have the most delicious and the healthiest food that resides beneath the packaging, but if the visuals on the product packaging do not communicate the intended message, the customers will just walk away. That is why Schawk, Inc. (NYSE:SGK)’s graphic services are so critical in catching the attention of their target customers and creating the connection between their customers’ brand and consumers.
Growth drivers
While there is stable demand for Schawk’s services from product line extensions by consumer packaged goods companies, the big leap in growth is coming from grocery retailers. Grocers are making a big push for private label products, given higher margins and increasing consumer adoption of such products. According to a Plant Retail report, private label sales for North American grocers are expected to grow to from $150 billion in 2009 to $209 billion in 2014.
Grocers are broadening their private label product range beyond frozen food to new product categories such as pet food and alcoholic beverages. Schawk, Inc. (NYSE:SGK)’s services are more likely to be used by these grocers, as they recognize the value of such services in differentiating their brands.
Peer comparison
Schawk’s peers include Matthews International Corp (NASDAQ:MATW) and RR Donnelley & Sons Co (NASDAQ:RRD). All three stocks have a stellar track record of positive free cash flow and dividends.
Matthews International derives half of its revenue from brand solutions, while the other half is generated from memorialization products used mainly in cemeteries. Its brand solutions include graphics imaging services similar to Schawk, Inc. (NYSE:SGK) for the corrugated and flexible packaging industries. In the first quarter of fiscal 2013, Matthews International Corp (NASDAQ:MATW) acquired Wetzel, a provider of pre-press services and gravure printing forms, to further expand its presence in Europe. Matthews International has increased its dividend every year for the past decade and sports a forward dividend yield of 1%.
RR Donnelley & Sons Co (NASDAQ:RRD), a global provider of integrated communication services, boasts of diversified revenue streams, with no single industry accounting for more than one fifth of its sales turnover. In contrast, Schawk, Inc. (NYSE:SGK) generates four fifths of its revenue from clients in the consumer packaged goods & private label industry. RR Donnelley & Sons Co (NASDAQ:RRD) is also North America’s largest printer, which puts it in a good position to benefit from industry trends such as smaller players exiting, customer demand for integrated solutions, and growth in digital print & print services. It has maintained its dividend per share of $1.04 for the past nine years and currently sports a forward dividend yield of 8.20%.
Schawk, Inc. (NYSE:SGK) has a forward dividend yield of 2.60% and currently trades at 9.8 times forward P/E. In comparison, Matthews International and R.R. Donnelley & Sons are valued by the market at 13.9 and 7.7 times forward P/E, respectively. While RR Donnelley & Sons Co (NASDAQ:RRD) might seem undervalued based on forward P/E and dividend yield, it is highly geared with $3.5 billion of debt on its books compared to its market capitalization of $2.3 billion.
Conclusion
Schawk’s graphic services draw consumers to their customers’ products and they cost only a fraction of the total advertising, promotion, and packaging costs for consumer products. This represents a strong economic moat for Schawk. A 2.60% dividend yield is the icing on the cake for an undervalued stock like Schawk with a forward P/E below 10.
The article This Stock Makes Customers’ Brands Stick originally appeared on Fool.com and is written by Mark Lin.
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