RRD Stock: RR Donnelley & Sons Flies on Earnings

RR Donnelley & Sons Co (NYSE: RRD) is flying in the premarket hours this morning, and for good reason. The company released its financial results for the fourth quarter, showing exceptional growth. At the same time, heavy short interest on the stock seems to be resulting in a short squeeze. Here’s what’s happening:

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RR Donnelley & Sons Reports Fourth Quarter Financial Results 

As mentioned above, RR Donnelley & Sons issued its financial results for the fourth quarter, and those results were overwhelmingly positive. 

In fact, RRD said that net sales improved on a sequential basis over the past two quarters. In fact, sales were so strong that they exceeded median guidance by more than $150 million. 

At the same time, GAAP EPS from continuing operations in the fourth quarter was up $0.41 per share with non-GAAP adjusted EPS up $0.28 per share. 

RRD is also greatly reducing its debt, cutting debts by $500 million in the fourth quarter, a $300 million decrease in debt year over year. Moreover, since 2016, the company has cut its debt by around $900 million and has brought liquidity up $322 millin from the third quarter to $865 million. 

Management Commentary 

In a statement, Dan Knotts, President and CEO at RRD, had the following to offer:

We delivered a strong fourth quarter to finish an extraordinary year. I am proud of the RRD team’s ongoing resilience and commitment to protect the health and safety of our global colleagues while delivering the essential marketing and business communications our clients need to propel their businesses. 

Our teams continue to deliver innovative solutions to our clients, aggressively execute our cost reduction plans, and make meaningful progress in improving our capital structure. For the second consecutive year, we achieved full year growth in adjusted income from operations and increased operating margins by lowering our cost structure, expanding client relationships, and securing new business. Additionally, we significantly reduced debt outstanding, extended upcoming maturities, and expanded our liquidity as we continue our drive to improve balance sheet flexibility. Our team is doing an incredible job in managing RRD through these unprecedented times and remains highly focused on advancing our strategic priorities into 2021.

A Short Squeeze May Be Starting

While the overwhelmingly positive fourth quarter earnings report is enough to send the stock upward, the gains are likely being exacerbated by a short squeeze at play. 

You see, RR Donnelley & Sons stock currently trades with short interest of around 31%. That’s incredibly high. 

When a stock ticks upward, those with short positions begin to lose money. As a result, they race to buy shares to cover their positions, leading to extreme increases in volume and price. With the positive fourth quarter earnings report, it only makes sense that the stock is ticking up. As a result, shorts are running for cover, helping to extend the gains in today’s session. 

Risks to Consider Before Buying RRD Stock

Before buying any stock, including RRD stock, it’s important to consider the risk. After all, risk is always going to be involved in investing. When it comes to RR Donnelley & Sons, some of the most significant risks to consider include:

  • Volatility. RRD stock is known to experience heavy levels of volatility. As a result, entrance and exit decisions are difficult to make and significant losses may be experienced in a short period of time. 
  • Pennies. RRD is a penny stock. In most cases, penny stocks are highly speculative plays that represent companies that don’t quite have a proven business model. 
  • Capital Risk. While earnings are improving, the company is still operating at a loss. If the company can’t reach profitability prior to money in the bank running dry, it will likely look to capital markets as a way to raise funds, leading to dilution of existing shareholder value and significant declines. 

Final Thoughts

Sure, there are risks to consider before diving into RR Donnelley & Sons stock, but that’s the case regardless of the investment you make. The fact of the matter is that things are going in the right direction for the company. 

With losses shrinking and revenue climbing, there’s good reason to be excited. At the same time, the company is paying off debt at a lightning pace, further improving its balance sheet and providing yet another reason for investors to consider diving in. All in all, RRD stock is one worth consideration. 

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