Donnelley Financial Solutions (NYSE:DFIN): A Peter Lynch-Style GARP Investment

Investors looking for long-term growth possibilities at fair prices often use established methods that mix expansion possibility with financial soundness. One such method comes from Peter Lynch, the famous manager of Fidelity's Magellan Fund, who supported finding companies with lasting earnings growth, good financial condition, and fair prices. His strategy highlights basic analysis instead of market timing, concentrating on businesses that mix growth traits with value investing ideas. This approach looks for companies increasing earnings between 15-30% each year, fast enough to provide returns but not so quick as to be unstable, while keeping good balance sheets and trading at fair multiples.

Donnelley Financial Solutions (NYSE:DFIN) resulted from a filter using Lynch's standards, presenting a strong case for growth at a reasonable price (GARP) investors. The company offers software and technology-supported financial regulatory and compliance services, helping capital markets and investment companies through its four business units. This operational focus places DFIN in a specific area inside financial services, matching Lynch's liking for clear business models in possibly "ordinary" but necessary fields.

Financial Health and Stability

Lynch favored companies with good balance sheets to handle economic changes and pay for continued growth. DFIN shows solid financial health through several important measures:

• Debt-to-equity ratio of 0.43, much lower than the filter's 0.60 limit and Lynch's chosen 0.25 level
• Current ratio of 1.29, showing enough short-term cash to meet needs
• Altman-Z score of 4.36, pointing to low bankruptcy danger and doing better than 82% of industry rivals
• Decreasing shares outstanding over one and five-year spans, indicating possible shareholder-conscious capital use

These measures show a company that handles its capital structure carefully, lowering financial danger while keeping operational room to maneuver. The moderate debt amount gives space for strategic spending without too much borrowing, while the good cash position makes sure daily activities can be paid for without strain.

Profitability and Efficiency

Lasting profitability was key to Lynch's method, as it supports internal growth and investor gains. DFIN displays good performance across several profitability gauges:

• Return on equity of 19.00%, putting it in the top 14% of capital markets companies
• Return on invested capital of 16.03%, beating 91% of industry opponents
• Three-year average ROIC much higher than the industry average of 7.64%
• Profit margin of 10.87% with recent upward movements
• Positive earnings and operating cash flow in four of the last five years

The high ROE and ROIC numbers show management's skill in using capital to create returns, a trait Lynch thought was important. The steady profitability over several years hints at business model strength, while the getting-better margins signal possible operational improvements being achieved.

Growth Path

Lynch looked for companies increasing at a maintainable speed, steering clear of both flat businesses and very-fast-growth cases likely to lead to letdowns. DFIN's growth picture shows notable traits:

• Five-year EPS growth rate of 24.57%, inside Lynch's desired span
• Estimated forward EPS growth of 13.76% per year
• Revenue expected to increase slowly at 0.94% per year after recent drops
• Speeding-up revenue growth forecast compared to recent years

The past EPS growth easily passes Lynch's 15% lowest limit while staying under the 30% top mark meant to spot maintainable expansion. The forward growth guesses, while slowing from past levels, still show good growth that seems possible given the company's market place and financial soundness.

Valuation Check

Fair price compared to growth possibility was vital to Lynch's method, stopping overpaying for future potential. DFIN shows a pleasing price picture:

• PEG ratio of 0.59 using past growth, much lower than the filter's 1.00 highest point
• P/E ratio of 14.40, looking good next to the S&P 500's 27.70 multiple
• Forward P/E of 11.93, showing a lower price than both market and industry averages
• Enterprise value to EBITDA ratio more inexpensive than 90% of industry peers

The below-1.0 PEG ratio suggests the market might be pricing DFIN's growth possibilities too low relative to its earnings multiple. This mix of fair total price and discounted growth payment fits well with Lynch's focus on finding growing companies selling at sensible prices.

Fundamental Analysis Summary

The complete fundamental analysis gives DFIN a total score of 6 out of 10, noting excellent health and profitability measures within the capital markets industry. The report points out the company's good financial foundation, fair price, and acceptable growth rate. While recent revenue drops and small EPS shrinkage bring up worries, the getting-better margin trends and expected growth speed-up give balancing good points. The analysis proposes DFIN's price seems right given its financial features, with special ability in capital efficiency measures.

For investors wanting to look at more companies meeting Peter Lynch's standards, the full filter findings offer many possible investment choices for more study.

Disclaimer: This analysis uses publicly available data and is given for learning reasons only. It does not offer investment guidance, and readers should do their own investigation and talk to financial experts before making investment choices. Past results do not ensure future outcomes, and all investments have risk including possible loss of original money.