Printing, pre-press, publishing and photography services – yesterday, today and tomorrow

IF HAROLD HAVERTY believed what he read about his company in the business press (FORBES included) or the analysts' reports, he would have merged his company into a bigger outfit with better prospects long ago. Fortunately, he believed neither reporters nor analysts.

Haverty, 60, is chief executive of Deluxe Corp. Based in St. Paul, Minn., and once known as Deluxe Check Printers, the company prints half of all checks written by individuals and small businesses in the U.S.

In the checkless society widely predicted early in the 1960s and again in the early 1980s (see, for example, FORBES, May 23, 1983), checks were to be replaced by the electronic transfer of funds. But when was the last time you used your personal computer to pay a bill? Americans wrote a total of about 48 billion checks last year, 37% more than they wrote in 1980. Deluxe turned in its 52nd year of record revenues: $1.4 billion and earnings of $172 million ($2 a share). Return on equity has averaged nearly 29% for over a decade.

Still, if printing checks is not a dead business, it is a mature business. In the last two years, growth in check demand has slowed to about 2% a year. There is very little room for growth through acquisition: Deluxe and two competitors, John Harland and Clarke American, now control roughly 90% of the check market.

Haverty says he is determined to maintain Deluxe's average real annual revenue growth at 5% to 8%. Some of that he can get from raising prices. Deluxe has raised prices every year since 1975. It currently charges its customers – primarily financial institutions – $8 to $15 for a box of 200 checks, depending on style and volume of orders. The institutions in turn typically add on an average 25% to 30% markup.

But if Deluxe is to grow 8% annually from its current size, price hikes will not be enough. Haverty will have to rely more and more on the diversifications that Deluxe began years ago.

In 1982 Deluxe began supplying a variety of document forms for computers used by small businesses, many of them its check buyers. In 1986 Deluxe spent $72 million acquiring A.O. Smith Data Systems, which sells software for automated teller machines and electronic funds transfer.

"If we lose a check to an ATM, we plan to catch the resulting transaction,'' says Haverty. This puts Deluxe into tough competition with processing operations run by Electronic Data Systems and banks like CoreStates Financial and Fifth Third Bancorp. But Deluxe is at least holding its own and now provides software and processes transactions for three of the five largest regional bank ATM networks. In a related diversification, Deluxe sells software for point-of-sale systems and electronic check-authorization services.

Deluxe moved further afield in 1987 when it bought Current, Inc., a direct mail vendor of discounted greeting cards and giftwraps, for $180 million. Current's sales grew 16% last year, to $218 million, while operating income increased over 33%, to an estimated $19 million.

Sales of Deluxe's forms increased 13%, to $164 million. But electronic funds transfer revenues grew by 7%, less than expected. Deluxe has now teamed up with Scicon Networks, the U.K.'s largest computer services company, to push sales in Europe's faster-growing funds transfer business.

All in all, Deluxe's new businesses have grown to the point where they now account for 35% of Deluxe's revenues and an estimated 25% of its operating income. Haverty expects them to keep growing much faster than the check-printing business and to account for a growing proportion of both revenues and profits.

What plans has Haverty in mind for Deluxe's cash pile – $104 million net of all debt and growing rapidly? No major acquisitions. But he is spending. He has nearly doubled Deluxe's dividend since 1986. And in the last two years he has repurchased nearly 2 million shares. There are 84 million outstanding; another buyback program will reduce that to 75 million. Likely cost: $270 million – if the shares are bought at last year's average repurchase price of $30.

Deluxe's stock was recently trading at 38 3/8, roughly 17 times estimated 1991 earnings. The lesson here: Next time someone predicts the demise, for technological reasons, of a soundly managed company, remind him or her about Deluxe.

Ignatius Chithelen