CMPR - Cimpress

[KCLarkin]

Starting a new thread for Cimpress (formerly Vistaprint) due to the name change. Old thread is here:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/vprt-vistaprint/

 

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Here is an interesting presentation from the Wide Moat summit:

http://www.valueconferences.com/2015/07/moat15-matthias-riechert/

 

To grow, this business needs to invest heavily in direct advertising (20% of sales). Capex and working capital investments are minimal. Riechert calculates Owner Earnings, assuming that half of the advertising expenses are growth investments. With his assumptions, he sees a 12x 2016E Price/Owner's Earnings multiple.

 

Not sure if this is the right way to look at this business but it does make me more comfortable with the valuation.

 

 

[Guest notorious546]

Mecham own's an large chunk of this but picked up most of his stake around 30-40 dollars.

 

I'm working through the investor day transcript right now and will post notes after.

 

cheers,

[KCLarkin]

Mecham own's an large chunk of this but picked up most of his stake around 30-40 dollars.

 

True, but earnings have also increased dramatically. Glenn Greenberg sold a big chunk in Q4 I bought a bit more on today's dip.

[handycap5]

i always struggled with how much this business had to "feed the machine" through new customer acquisition marketing dollars. obviously, a business with this feature can work-out fine, but it is very sensitive to changes in the NPV of the new customer acquisition. i was always nervous with the cimpress need to recreate its customer base every few years. i would love owners' thoughts on how they get comfortable with this dynamic or how this appraissal/concern is wrong...

[KCLarkin]

i always struggled with how much this business had to "feed the machine" through new customer acquisition marketing dollars. obviously, a business with this feature can work-out fine, but it is very sensitive to changes in the NPV of the new customer acquisition. i was always nervous with the cimpress need to recreate its customer base every few years. i would love owners' thoughts on how they get comfortable with this dynamic or how this appraissal/concern is wrong...

 

I'd start by breaking NPV down further. Some key inputs:

 

Revenue per User (RPU)

Retention

COGS

Cost of Acquisition (COCA)

 

If you believe in the new corporate strategy (and it seems to be working), you should expect RPU and retention to increase. Given economies of scale, COGS should be flat to down. So COCA seems to be the main risk.

 

COCA is increasing as they target higher value customers. But it could also increase due to competition, market saturation, or Google. These risks are balanced by increased retention and improving Net Promoter Scores (NPS).

 

Regardless, NPV is likely to change slowly and management gives sufficient detail for you to monitor these risks. However, there is black swan risk in the case of a sudden changes at Google.

 

 

 

 

 

[Arden]

An interesting anecdote- if you look at google trends the number of searches for cimpress is less that 1% than the searches for vistaprint

 

https://www.google.com/trends/explore#q=Cimpress%2C%20vistaprint&cmpt=q&tz=Etc%2FGMT-3

[KCLarkin]

Cimpress is the name of the holding company. The main brand name is still Vistaprint.

[Guest notorious546]

fiscal 2015 numbers are out, on the company's "steady state" free cash flow guidance the company yields 8-14%. high single digit or double digit free cash flow yields is what i look for.

 

http://www.businesswire.com/news/home/20150729006678/en#.Vbotp_lVhBc

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTg4NjgxfENoaWxkSUQ9Mjk2OTc1fFR5cGU9MQ==&t=1

 

the letter to investor's is something i would recommend everyone read if they have not.

[KCLarkin]

I haven't listened to the call yet, but chaos reigns. For 2015, they beat my cash earnings by 10%. The new "guidance" doesn't give enough information to estimate 2016 cash earnings or profit margins but it sounds like they will be investing heavily in 2016. They really like to surprise investors (in a bad way).

 

On the plus side:

a) will no longer be excluding share compensation from adjusted earnings

b) admitted past mistakes in Webs and Namex purchases

c) Revenue growth (CC) for Vistaprint was very strong

 

Overall, a fantastic year but another confusing strategy shift. Hopefully things will become clearer during investor day. I just hope Keane doesn't have a Bezos complex.

 

[Txvestor]

I do not think Keane has a Bezos complex. He is a shrewd entrepreneur building for the long term and investing in his business based on the wisest long term interest. You could almost sense his disdain for wall street analysts and their near term vision. I think he has made a few errors recently and the good thing is he has readily acknowledged them in the letter to investors even going as far as to say buying back shares would've been wiser.

I think the business has long term tailwinds and his avowed strategy for capital allocation is pretty sound. Besides that he is a sizeable shareholder himself. This stock has been volatile due to the compulsive nature of the fast money crowd. Take a longer term view of the company and it has been a value creating machine. That's the additional point i like with this investment, I see this being a potentially decade long hold for growth with tremendous internal growth reinvestment opportunities, that can serve to reduce frictional costs/taxes. Nowadays thats not always easy to find and potentially a tremendous source of value creation. Considering current and directional trend of dividend and capital gains taxes in th USA, i further like that they do not plan to pay a dividend anytime soon.

I read his letter to investors and liked the way he explained the investment strategy and expectations going forward and capital allocation plans. I felt his comments on steady state cash flow to be quite insightful and his comments on that on the conference call was added insight. I did find his response to Glen Greenberg's question a bit weak and it sounded like he was somewhat ill prepared for that question, clearly they were not as good with capital allocation last 4-5 yrs as the prior period when they significantly reduced share count by roughly a third. Greenberg's point was basically to say, i hope you are allocating more wisely.

I calculate that at $65-$66 a share you are buying it at a roughtly 12-13% FCF yield with some growth thrown in there. Considering Mr Keane's longer term track record of capital allocation(even if you dismiss the more recent record, on which the jury is still out in my opinion), this seems a decent entry point for a company with a sizeable business moat.

I've always felt Wall street places too much emphasis on quarterly metrics and near term visibility and if you see a longer term trend and can ignore the operational noise, you can benefit, by looking for good entry points. I added to my already sizeable portfolio position by 20% on todays(unreasonable pullback IMHO). I don't understand how todays letter or quarterly results make this company 20% less valuable, and more like 30% less valuable than its recent peak near $92.

[KCLarkin]

This is my top position (>10%) so I do believe in the company. It's one thing to be dismissive of the analysts but Keane really can't tell Greenberg that he is targeting at least 8.5% return on their capital. Given the investment opportunities (and their mixed track record), they should be targeting at least 20%.

 

Fortunately, I trimmed a bit at $85. Added 15% today. Hopefully will add more below $65 over the next few days.

[Homestead31]

 

I calculate that at $65-$66 a share you are buying it at a roughtly 12-13% FCF yield with some growth thrown in there.

 

Hi - can you walk me through how you're getting a 12-13% FCF yield?

 

i'm looking at:

 

Price: 66.11

Basic Shares Out: 32,644,870

Mkt Cap: 2,158,152

 

OCF: 228,874

Spending on PP&E: -75,813

FCF:  153,061

 

2,158,152 / 153,061 = 14.1x = 7% FCF yield

 

I am just getting started on this and obviously there are different ways to skin a cat - are you just looking at maintenance capex?  which by your numbers would be about half of the full spending PP&E line item?

 

thanks

[kab60]

You might wanna read their investor letter, homestead. It is a good read. They state steady state FCF is 210-385m. I have no opinion as to whether that is correct.

[Txvestor]

This is my top position (>10%) so I do believe in the company. It's one thing to be dismissive of the analysts but Keane really can't tell Greenberg that he is targeting at least 8.5% return on their capital. Given the investment opportunities (and their mixed track record), they should be targeting at least 20%.

 

Fortunately, I trimmed a bit at $85. Added 15% today. Hopefully will add more below $65 over the next few days.

 

I agree with you, the answer he gave to Greenberg was the most unconvincing part of the entire call. When Greenberg pointed out that they had invested 850M over the past 4 yrs and are earning only 48M more to show for it despite their high overall ROIC as a company, it was a tacit criticism of their recent capital allocation strategy which I think was a fair criticism. However I do not think it was all frittered away. Many of their european acquisitions even if pricey at acquisition are growing really rapidly and there is not a mass customization platform of such scale in that market that I am aware of, likely representing a significant market opportunity that they did not want to cede having seen the benefits of it in their US home market. As long as the european subsidiaries continue to grow the way they are doing, longer term i think we will likely be glad they did that.

They did say they have a 15% hurdle for developed market acquisitions(though i think they have gone below that on the recent european acquisitions) and 25% in developing markets, but would look at lower than 15% for internal opportunities where they know they could sell the product. I think they failed to articulate that they are looking at current return plus growth with their acquisitions and also probably could/should have committed to atleast a 15% hurdle below which they would instead consider share repurchases, considering recent acknowledged missteps. That would have served to demonstrate their confidence in their own business first and foremost. All that said, I fail to see anything fundamentally wrong with the business and worthy of todays decline.

[Txvestor]

 

I calculate that at $65-$66 a share you are buying it at a roughtly 12-13% FCF yield with some growth thrown in there.

 

Hi - can you walk me through how you're getting a 12-13% FCF yield?

 

i'm looking at:

 

Price: 66.11

Basic Shares Out: 32,644,870

Mkt Cap: 2,158,152

 

OCF: 228,874

Spending on PP&E: -75,813

FCF:  153,061

 

2,158,152 / 153,061 = 14.1x = 7% FCF yield

 

I am just getting started on this and obviously there are different ways to skin a cat - are you just looking at maintenance capex?  which by your numbers would be about half of the full spending PP&E line item?

 

thanks

 

I got the FCF yield from their investor letter. Like the poster above said they gave a steady state FCF estimate of 210M and 175M investments as a mixture with some growth investment component and maintenance capex. Even using just a quarter of that as growth expenditure gets you to 12%.

They however would be wise to use opportunities to do some share buybacks. They claim to have seen the light having missed out when share price was under 40 a couple years ago, especially comparing that option to a couple of poor acquisitions they did around then. Time will tell.

Considering the increase in intrinsic value over the last 2yrs and the overall current richness of the market for acquisitions etc. they may be well served nibbling around here instead of their 'acquisition pipeline' which they also mentioned.

[Homestead31]

You might wanna read their investor letter, homestead. It is a good read. They state steady state FCF is 210-385m. I have no opinion as to whether that is correct.

 

thanks - i just got through it and obviously should have read it before posting.

 

This is interesting - there has always been a vocal short community on this name that thought the accounting was funky.  on one hand, i love the long term orientation of management, and if you believe their view on steady state cash flow, it is cheap.

 

on the other hand,  if you are one of the shorts that questions their accounting, you are drooling right now b/c the fact that they are going to stop giving guidance and operating metrics looks funky if you're wearing short glasses.

 

what seems clear regardless is that there is a long runway for growth.  whether it will be profitable growth seems to be up for debate, although i am inclined to believe that the operating leverage here is substantial

[Jurgis]

People here are way overpositive. There is no FCF. They had 228M OCF and they spent 217M.

 

Ah, yes, acquisition spending does not count. Prevalent opinion through most of CoBF during the 7th year of bull market.

[Homestead31]

to Jurgis' point, this is where the accounting is tricky. 

 

by definition capex should be registered on the balance sheet and depreciated/amortized over time.

 

however, the company considers much of their "expensed expenses" to essentially be capex which reduces OCF through a lower net income which does not benefit from a D&A add back.

 

i am leaning toward the view that to use management's metrics and definition of steady state cash flow as your paradigm you have to believe that if these "expensed expenses" do not yield fruit in the near future they will stop the spending and just let the core business shine.  in my view, management's dogmatic approach to growth indicates that they have no intention of ever stopping the quest for growth, and as greenberg pointed out, thus far this quest has lit a lot of cash on fire.

[KCLarkin]

People here are way overpositive. There is no FCF. They had 228M OCF and they spent 217M.

 

This analysis might be useful for a no-growth company but not terribly relevant for a company growing 20% per year.

[KCLarkin]

i am leaning toward the view that to use management's metrics and definition of steady state cash flow as your paradigm you have to believe that if these "expensed expenses" do not yield fruit in the near future they will stop the spending and just let the core business shine.  in my view, management's dogmatic approach to growth indicates that they have no intention of ever stopping the quest for growth, and as greenberg pointed out, thus far this quest has lit a lot of cash on fire.

 

I agree that the analysis of "steady state" cash flow provides no value. It would be useful to say that they are spending $X million in CapEx and $Y million on OpEx for Project Z and we expect to be breakeven by a specific date.

 

I don't think the quest for growth is lighting cash on fire. By all accounts, the recent "upload and print" acquisitions look like a homerun both financially and strategically. The beauty of this business is the ability to reinvest a large amount of cash flow for a long time at high rates of return. They just need to be more disciplined on costs and hurdle rates.

[Jurgis]

People here are way overpositive. There is no FCF. They had 228M OCF and they spent 217M.

 

This analysis might be useful for a no-growth company but not terribly relevant for a company growing 20% per year.

 

You can do whatever analysis you want, but calling a spoon a spade won't help it.

 

Acquisitions and capex are the same. Both can be growth capex. Also both can be maintenance capex (if you acquire companies to replace factories that are falling apart). In either case, cash spent on them is not FCF. FCF is what goes into the bank after your capex and acquisitions.

 

At least call it FCF-before-growth-expenditures. ;)

[Txvestor]

to Jurgis' point, this is where the accounting is tricky. 

 

by definition capex should be registered on the balance sheet and depreciated/amortized over time.

 

however, the company considers much of their "expensed expenses" to essentially be capex which reduces OCF through a lower net income which does not benefit from a D&A add back.

 

i am leaning toward the view that to use management's metrics and definition of steady state cash flow as your paradigm you have to believe that if these "expensed expenses" do not yield fruit in the near future they will stop the spending and just let the core business shine.  in my view, management's dogmatic approach to growth indicates that they have no intention of ever stopping the quest for growth, and as greenberg pointed out, thus far this quest has lit a lot of cash on fire.

 

Fair point and perhaps the main reason the shares are getting hammered. However you can't argue that they have now been delivering on top line growth after their transition from a discounting strategy. Additionally they claim that some of the acquisitions are returning around the cost of cpaital but once fully integrated would hit their hurdle rate. That remians to be seen, but not impossible.

Finally they did admit in the investor letter that with atleast 3 of their acquisitions, the capital would've been better spent on share buybacks when their shares languished in the sub 40$ range at the time.

Obviously actions speak louder than words, and Greenberg did all shareholders a service by calling them out on the past 4yrs, to which Keane's answer appeared unprepared and somewhat defensive.

That said, the underlying business appears strong and surely the management got the message loud and clear.

Any of you think Greenberg might be selling here? His last 2 13fs showed him sizeably reducing his stake.

 

[KCLarkin]

If a CEO gave me that response, I would sell. But I hope he is working behind the scenes to help Keane sharpen his thinking.

[Guest notorious546]

this is a bit off topic, but any idea if greenberg has asked questions on other conference calls before this one or other companies? i'm almost surprises he would ask on a forum like that.

[KCLarkin]

Yes, he has asked on previous calls. I remember one where he was one of only a few questions.