DONNELLEY FINANCIAL SOLUTION (NYSE:DFIN) Embodies Peter Lynch's GARP Strategy

In long-term investing, few strategies have received as much respect as the approach supported by Peter Lynch, former manager of the Magellan Fund. His methodology, detailed in One Up on Wall Street, highlights identifying companies with sustainable growth, reasonable valuations, and strong financial health, often called the Growth at a Reasonable Price (GARP) style. Lynch supported a disciplined, fundamental analysis-driven process that avoids market timing and speculative trends, concentrating instead on businesses that an investor can understand and hold for extended periods. This strategy depends on metrics such as earnings growth, profitability, debt levels, and valuation ratios to find stocks that may be set for long-term success without overpaying for future potential.

DONNELLEY FINANCIAL SOLUTION (NYSE:DFIN) appears as a candidate that matches closely with Lynch’s criteria, making it a notable consideration for GARP-oriented investors. The company, which provides software and technology-enabled financial regulatory and compliance solutions, works in a niche but essential segment of the capital markets industry. Its business model, supporting regulatory filings, deal solutions, and compliance communications, is both understandable and defensible, fitting Lynch’s preference for companies in straightforward, necessary sectors rather than flashy, high-risk industries.

Several key metrics show why DFIN is notable under the Lynch framework:

• Earnings Per Share Growth: Lynch preferred companies with strong but sustainable earnings growth, typically between 15% and 30% annually to avoid overheating. DFIN’s five-year EPS growth rate of 24.57% falls squarely within this range, indicating good historical performance without excessive expansion that could be hard to maintain.
• PEG Ratio: Valuation is critical in Lynch’s strategy, and the PEG ratio, which adjusts the P/E ratio for growth, is a cornerstone. A PEG below 1 suggests a stock may be undervalued relative to its growth trajectory. DFIN’s PEG of 0.64 signals that it is trading at an attractive price given its earnings growth, matching Lynch’s emphasis on finding reasonably priced growth.
• Debt-to-Equity Ratio: Financial health is non-negotiable for Lynch, who preferred companies with minimal debt. DFIN’s debt-to-equity ratio of 0.43 is not only below the screen’s threshold of 0.6 but also nears Lynch’s stricter ideal of below 0.25, reflecting a conservative capital structure that lowers risk during economic downturns.
• Current Ratio: Liquidity is another Lynch checkpoint to ensure a company can meet short-term obligations. DFIN’s current ratio of 1.29 exceeds the minimum requirement of 1, indicating adequate short-term financial stability.
• Return on Equity: Profitability is measured through ROE, with Lynch targeting at least 15%. DFIN’s ROE of 19% demonstrates efficient use of equity and good profitability, a positive sign for sustained performance.

These metrics together create a picture of a company that has grown earnings at a healthy rate, maintains a reasonable valuation, carries manageable debt, and shows solid profitability, all signs of a Lynch-style investment. Importantly, DFIN’s business in regulatory and compliance solutions is both recurring and necessary, providing a level of revenue stability that Lynch appreciated in long-term holdings.

Beyond the screen-specific criteria, DFIN’s broader fundamental profile, as detailed in its fundamental analysis report, supports its appeal. The company earns an overall rating of 6 out of 10, with particular strengths in profitability and financial health. It has excellent returns on assets, equity, and invested capital, doing better than most industry peers. Solvency metrics are strong, with a low debt-to-free-cash-flow ratio and a healthy Altman-Z score, lowering bankruptcy risk. Valuation is reasonable, with a P/E ratio below the S&P 500 average, and while revenue growth has been muted, future EPS growth is projected at nearly 14%, suggesting potential for continued expansion.

For investors interested in exploring other companies that meet similar criteria, the Peter Lynch strategy screen offers a curated list of stocks that match these principles. This tool can help identify additional opportunities for building a diversified, long-term portfolio.

In summary, DONNELLEY FINANCIAL SOLUTION represents a strong case for investors seeking growth at a reasonable price, as it includes the key parts of Peter Lynch’s strategy: sustainable growth, sound financials, and an understandable business model. While past performance and metrics are encouraging, thorough due diligence, including assessing industry dynamics, competitive positioning, and future growth drivers, remains essential before any investment decision.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.