Concentrated Risk in the Printing and Publishing Industry
The printing and publishing industries have been challenged by secular headwinds, which includes companies as diverse as newspapers all the way to specialty paper makers. Companies within the industries have more or less universally reduced their spending in traditional print areas as they move towards digital communications. However, cumbersome debt loads are preventing some players in the space from moving toward these vital strategic investments.
Over the last few quarters, the FRISK® Stress Index for U.S. printing and publishing companies has pushed towards multi-year highs. This proprietary model effectively measures the probability of failure in a group of companies across industry, country or portfolio. The trends are clearly problematic for U.S. printing and publishing companies:
In addition to the spike in the red line, which represents the group's overall riskiness, note the gray bars at the bottom of the graphic: the downward trend here reflects industry consolidation and bankruptcies. Such names disappearing from the industry index have not been enough to supress the increase in the industry's overall risk profile.
In fact, when you dig into the individual names that make up the full group, 38% fall into the FRISK® "red zone." The FRISK® score is a proprietary measure that predicts bankruptcy risk for public companies, with a 96% accuracy rate when viewing through a 12-month prism. To compute the score, we use four data components: market sentiment, credit agency ratings, financial ratios, and subscriber crowdsourcing. The best score is "10" and "1" is the worst. Any score at “5” or below puts a company in the high-risk red zone, and upon entry into this territory, we suggest that subscribers pay very close attention to counterparty risk.
Looking through the list of companies with FRISK® scores in the red zone, we decided to dig deeper into the story at Cenveo, Inc. (NASDAQ: CVO). This business produces envelopes, labels and other commercial printing products, currently generating more than $1.5 billion in annual sales revenue. Its FRISK® score of "1" indicates elevated default and/or bankruptcy risk over the next 12 months.
Currently, the statistical bankruptcy range for Cenveo is between 10-50%. This spread is more than what many risk managers would be able to tolerate. Based on second quarter financials, three out of its four segments reported lower operating income which resulted in an overall operating income decline exceeding 25% year-over-year; this excludes realized gains from debt extinguishment.
What really drove our interest in this name, however, was the crowdsourcing component of the FRISK® score. The research patterns of our subscribers indicated heightened concern about Cenveo over the last few months. This behavioral data suggests risk may be increasing at the company as you read this.
According to CreditRiskMonitor’s commercial credit report, Cenveo has a negative tangible net worth as well as an elevated debt-to-EBITDA ratio of more than 11 times. This high figure reflects declining margins, as well as recurring restructuring costs. Moreover, net income has been negative over the last three quarters. Cenveo is under pressure today and this weakness is undermining its ability to adjust to industry changes.
The FRISK® Stress Index is highlighting increasing risk in the print and publishing industry right now. Digging down into that group, our subscribers are particularly concerned about Cenveo. Although risk in this diverse industry is spread among multiple names, unsecured creditors should take extra care with Cenveo. This outlook is primarily driven by the combination of its bottom rung FRISK® score and the crowdsourced research patterns we're seeing among our subscriber base.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.