Commercial Printer LSC Communications Downgraded By JPMorgan On Fundamental Concerns

Shares of commercial printing company LSC Communications Inc LKSD have rallied 35 percent over the past two months — fueled in part by an upward revision to revenue guidance — prompting JPMorgan to press the sell button. 

The Analyst

Analyst Alexia Quadrani downgraded shares of LSC Communications from Neutral to Underweight but maintained a $14 price target, suggesting 14-percent downside. 

The Thesis

Despite LSC Communication's track record of making small-to-midsized acquisitions, increasing its printing capabilities and breadth of product offering, the M&A activity may not realize the expected cost synergies, Quadrani said in a Friday note. (See the analyst's track record here.) 

This gap between expectations and reality means potential downside risk for LSC Communications estimates, Quadrani said. 

Fundamentally, the company is likely to be pressured by ongoing print declines, margin compression resulting from volume and pricing pressures and the ongoing shift from traditional office product retailers to online networks, the analyst said. 

JPMorgan sees risk to the company's ability to finance its dividend due to the uncertainty surrounding the "longer-term" health of the core business.

The recent spike in shares is unsustainable, Quadrani said. 

"Overall, we believe risk is skewed to the downside and look for better longer-term fundamental trends in the core business before becoming more positive on the stock." 

The Price Action

LSC Communications shares were plunging 12 percent to $14.28 at the time of publication Friday morning. 

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