CMPR - Cimpress

[InvestingOnSale]

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. ;)

 

I'm reminded of Buffet's owners' earnings concept, which is meant as a measure of FCF or the cash return the business is creating every year. There, maintenance capex is deducted from earnings plus D/A, but growth capex is not.

 

I am under the presumption that most of Cimpress's acquisitions are growth acquisitions. At least one acquisition (Pixartprinting for 127mn euro) is meant to go after the higher-end segment of the market, in which Cimpress has competed poorly, so that seems to be a growth acquisition. Do you think their acquisitions are maintenance acquisitions, and, hence, that the cash used on them should be deducted when measuring owners' earnings or FCF?

 

It is valid to argue that their growth capex decisions have been poor, and hence, that you will not give them credit for that cash in your FCF analysis. But to otherwise not count growth capex spending in FCF is too harsh.

[KCLarkin]

All of their acquisitions are for growth.

[dwy000]

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. ;)

 

There's got to be some irony in the fact that Greenberg's largest position (36% of his fund) is in Valeant - which always faced the same "is there really cash flow or are all the acquisitions hiding the fact that it isn't real"

[Jurgis]

But to otherwise not count growth capex spending in FCF is too harsh.

 

It's not about being harsh or not. It's about calling spade a spade. :)

 

I'm fine if people say: "OK, this amount of capex/acquisitions is growth capex and I will measure the company by not subtracting it from OCF to produce FCF-plus-growth". I'm not very happy when people just define this as FCF. Perhaps I should just define RFCF (Real FCF) as the cash that really goes to the bank and is not spent on capex or acquisitions.

 

One of the dangers of defining FCF as being the same as FCF-plus-growth is double counting. I.e. "we are getting 10% yield now and company is growing at 15%" (percentages a bit fake). Not really. If company is buying growth and you are counting that growth, then you should only count RFCF as current yield, which might be only 1-2%.

 

Edit: "we are getting 10% yield now and company is growing at 15%" is also misleading when compared to a company B that is "getting 10% RFCF yield now and company is growing at 15%"

 

Take care

[Christopher1]

Greenberg asked a couple of questions even during the last VRX CC

[Guest Schwab711]

I agree with Jurgis's point and I think it's an extremely important point to consider when investing in CMPR or similar companies. This is why stock analysts highlight organic growth so much. It drastically changes how expected returns are calculated. FCF is being used to fund rev growth (this is how stocks compound earnings - near 100% reinvestment of FCF), but there's a reason Buffett uses the phrase Owner-Earnings instead of FCF. Technically shareholders have access to the FCF (ex-acquisition costs), but that is only valid if growth is organic. This is not the case with CMPR. Jurgis's point is important because investors are fooling themselves into thinking expect returns are higher than they are. Expected returns are probably 10%-15% with extremely high operational, capital allocation, and reinvestment risk. Without taking on this large amount of risk, CMPR would have a lower (and more predictable) expected return with little-to-no compounding of earnings. Without FCF reinvestment, expected returns are simple interest and not compounding interest. It also transfers reinvestment risk to shareholders. You can't have it both ways when it comes to expected returns. I think companies growing through acquisitions are easily overvalued in general because of this type of thinking. It is absolutely possible for star investment managers to invest while knowing this because their situation and incentives for investing are drastically different than anyone on this board.

[KCLarkin]

I agree with Jurgis's point and I think it's an extremely important point to consider when investing in CMPR or similar companies. This is why stock analysts highlight organic growth so much. It drastically changes how expected returns are calculated. FCF is being used to fund rev growth (this is how stocks compound earnings - near 100% reinvestment of FCF), but there's a reason Buffett uses the phrase Owner-Earnings instead of FCF. Technically shareholders have access to the FCF (ex-acquisition costs), but that is only valid if growth is organic. This is not the case with CMPR. Jurgis's point is important because investors are fooling themselves into thinking expect returns are higher than they are. Expected returns are probably 10%-15% with extremely high operational, capital allocation, and reinvestment risk. Without taking on this large amount of risk, CMPR would have a lower (and more predictable) expected return with little-to-no compounding of earnings. Without FCF reinvestment, expected returns are simple interest and not compounding interest. It also transfers reinvestment risk to shareholders. You can't have it both ways when it comes to expected returns. I think companies growing through acquisitions are easily overvalued in general because of this type of thinking. It is absolutely possible for star investment managers to invest while knowing this because their situation and incentives for investing are drastically different than anyone on this board.

 

You are profoundly misunderstanding the Cimpress thesis. This is not primarily a growth by acquisition story.

 

---

 

Of course what you are saying is true. A company that can pay a 10% dividend and grow intrinsic value 15% per year is more valuable than a company that merely grows 15% per year. But the people in this thread (not me), who are using FCF to value this company were not double counting. They are saying that when the company stops investing in growth, the FCF yield will be X% based on the share price today.

 

 

[InvestingOnSale]

Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result. -Munger

[Guest notorious546]

Have you guys read the IPO prospectus?

http://library.corporate-ir.net/library/18/188/188894/items/168194/prospectus_sept_05.pdf

 

I found some things that concern me a bit about the history of the company.

On July 2nd, 2004, we entered into a termination agreement with mod-pac that effectively termined all then existing supply agreements with Mod-Pac as of August 30, 2004. Pursuant to the termination agreement, we paid Mod-pac a one-time $22 million termination fee.

- The CEO’s brother and father are in direct competition with some of their operating segments.  (http://www.modpac.com/about/management.html) . What is your view on this?

[TREVNI]

I’d like to weigh in here from the vantage point of a commercial banker.  Although – full disclosure – I am a CMPR shareholder, my aim is not to convince anyone on the merits/specifics of this company (I do my best to avoid consistency/commitment bias), but rather in the hopes of clarifying some general points on cash flow. 

 

Even in the banking world there is confusion about cash flow, which is kind of surprising given our jobs are to determine a company’s ability to service its debt in actual, cold hard cash.  To start with the worst kind of analysis, some consider gross cash flow (EBITDA) as the only relevant measure.  Of course this ignores the economic reality of capital expenditures – rebuilding the capital account due to the ‘erosion’ effect of depreciation – and therefore overstates a company’s ability to repay.  Relevant here is Munger’s comment about EBITDA as ‘bullshit earnings’. 

 

A better analysis considers if a company has “earned” its debt service.  This is probably closest to what the company calls its ‘steady state free cash flow’, and to Buffett’s ‘owner earnings’ concept.  Simply put, has the company generated a sufficient amount of cash flow to replenish its capital account (maintenance capex), and pay its debt service? This would also include a deduction for ‘ersatz earnings’ or an amount of cash flow that in reality must be added back into the business for inflation in the PP&E account or in the working capital accounts. 

 

I think it is at this juncture that people get confused.  The last sort of cash flow analysis is what us bankers call a UCA cash flow.  At the end of the day, how have the changes in the balance sheet, and other semi/full discretionary items affected the flow of cash?  For example, if you mow your neighbor’s lawn and he agrees to pay you $25 in one week, you’ve definitely earned $25, but you can’t spend it on anything because you’ve effectively created a $25 entry into your personal accounts receivable.  Some things are ‘manageable’, that is, a manager can delay payment to suppliers, thereby raising cash by increasing accounts payable.  You might provide a discount to your customers to receive your own accounts receivable quicker, raising cash.  These things are important, no doubt, but they are temporary. You can only stiff your suppliers so long before they stop doing business with you.  Operating cash flow is only a proxy for cash flow since changes in balance sheet accounts affects the figure. In the short term (~1 year) this matters since cash in the bank is necessary to pay debt and other expenses.  In the long term these fluctuations smooth out.

 

How does this relate to CMPR, and how does it relate to valuation? In the end what matters is “distributable” cash flow, irrespective of capital allocation decisions.  You have to ask ‘how much cash could this business deliver to me, and when?’. Complicating matters is the fact that capex is ‘co-mingled’ – both maintenance and growth capex are not specified from an accounting point of view.  Furthermore, other investments such as R&D don’t show up as capex, since GAAP requires them to be expensed.  This is where trust/confidence in management becomes paramount.  You can, to be sure, make approximations about maintenance capex and ‘required’ marketing vs growth marketing, but in the end we trust the company to tell us.  A dishonest manager could play around with these figures for sure, hence some of the apprehension. 

 

My own approach is as follows: I ask, how much cash could this company distribute to me if it were to maintain its existence, taking into account maintenance capital expenditures necessary to maintain unit volume, allowing for inflation, etc., amortization charges unrelated to its future economic existence, and also taking into account any marketing that, while it might be brand building, could also be just an expense (and not an add-back item). This is owner earnings.  You own the company and the president comes to you and says, ‘owner, I’ve gone through X period (months, quarter, year), and generated this much cash.  We’ve spent the necessary capital to bring our plant and equipment back up to par with where we started (this is the Bruce Greenwald approach), what would you like to do now?’ This is the crux, the critical capital allocation decision.  You can say either: distribute to me the cash and go about business as usual, or you might say, let’s invest in growth.  You can grow by investing in branding via marking, or, if needed, through physical plant growth, or through acquisitions. 

 

Valuation should be made on the basis of normalized distributable owner earnings.  Using EBITDA leads to overvaluation, since you’re capitalizing an expense essentially; using only ‘bankable cash’ leads to undervaluation, since the outlay of cash for growth should, at least, maintain value (invested at the cost of capital), and at best add value (invested above the cost of capital).  (Side note: if you think a company is going to invest below the cost of capital this should/will detract from value; but if this were the case you probably would pass on the investment for lack of confidence in management.)

 

Last point: The key questions needed here are: 1. Since management is choosing to reinvest, do I trust management with capital allocation, do they have the right approach and owner mindset? 2. Approximately how much cash is going toward growth, either in the form of additional marketing, capital expenditures, and/or acquisitions?

 

[KCLarkin]

Investor Day covers the new strategy in detail:

http://ir.cimpress.com/phoenix.zhtml?p=irol-eventDetails&c=188894&eventID=5197522

 

Looks promising. The Mass Customization Platform looks risky but would create an enormous moat if it works.

[ZenaidaMacroura]

I’d like to weigh in here from the vantage point of a commercial banker.  Although – full disclosure – I am a CMPR shareholder, my aim is not to convince anyone on the merits/specifics of this company (I do my best to avoid consistency/commitment bias), but rather in the hopes of clarifying some general points on cash flow. 

 

Even in the banking world there is confusion about cash flow, which is kind of surprising given our jobs are to determine a company’s ability to service its debt in actual, cold hard cash.  To start with the worst kind of analysis, some consider gross cash flow (EBITDA) as the only relevant measure.  Of course this ignores the economic reality of capital expenditures – rebuilding the capital account due to the ‘erosion’ effect of depreciation – and therefore overstates a company’s ability to repay.  Relevant here is Munger’s comment about EBITDA as ‘bullshit earnings’. 

 

A better analysis considers if a company has “earned” its debt service.  This is probably closest to what the company calls its ‘steady state free cash flow’, and to Buffett’s ‘owner earnings’ concept.  Simply put, has the company generated a sufficient amount of cash flow to replenish its capital account (maintenance capex), and pay its debt service? This would also include a deduction for ‘ersatz earnings’ or an amount of cash flow that in reality must be added back into the business for inflation in the PP&E account or in the working capital accounts. 

 

I think it is at this juncture that people get confused.  The last sort of cash flow analysis is what us bankers call a UCA cash flow.  At the end of the day, how have the changes in the balance sheet, and other semi/full discretionary items affected the flow of cash?  For example, if you mow your neighbor’s lawn and he agrees to pay you $25 in one week, you’ve definitely earned $25, but you can’t spend it on anything because you’ve effectively created a $25 entry into your personal accounts receivable.  Some things are ‘manageable’, that is, a manager can delay payment to suppliers, thereby raising cash by increasing accounts payable.  You might provide a discount to your customers to receive your own accounts receivable quicker, raising cash.  These things are important, no doubt, but they are temporary. You can only stiff your suppliers so long before they stop doing business with you.  Operating cash flow is only a proxy for cash flow since changes in balance sheet accounts affects the figure. In the short term (~1 year) this matters since cash in the bank is necessary to pay debt and other expenses.  In the long term these fluctuations smooth out.

 

How does this relate to CMPR, and how does it relate to valuation? In the end what matters is “distributable” cash flow, irrespective of capital allocation decisions.  You have to ask ‘how much cash could this business deliver to me, and when?’. Complicating matters is the fact that capex is ‘co-mingled’ – both maintenance and growth capex are not specified from an accounting point of view.  Furthermore, other investments such as R&D don’t show up as capex, since GAAP requires them to be expensed.  This is where trust/confidence in management becomes paramount.  You can, to be sure, make approximations about maintenance capex and ‘required’ marketing vs growth marketing, but in the end we trust the company to tell us.  A dishonest manager could play around with these figures for sure, hence some of the apprehension. 

 

My own approach is as follows: I ask, how much cash could this company distribute to me if it were to maintain its existence, taking into account maintenance capital expenditures necessary to maintain unit volume, allowing for inflation, etc., amortization charges unrelated to its future economic existence, and also taking into account any marketing that, while it might be brand building, could also be just an expense (and not an add-back item). This is owner earnings.  You own the company and the president comes to you and says, ‘owner, I’ve gone through X period (months, quarter, year), and generated this much cash.  We’ve spent the necessary capital to bring our plant and equipment back up to par with where we started (this is the Bruce Greenwald approach), what would you like to do now?’ This is the crux, the critical capital allocation decision.  You can say either: distribute to me the cash and go about business as usual, or you might say, let’s invest in growth.  You can grow by investing in branding via marking, or, if needed, through physical plant growth, or through acquisitions. 

 

Valuation should be made on the basis of normalized distributable owner earnings.  Using EBITDA leads to overvaluation, since you’re capitalizing an expense essentially; using only ‘bankable cash’ leads to undervaluation, since the outlay of cash for growth should, at least, maintain value (invested at the cost of capital), and at best add value (invested above the cost of capital).  (Side note: if you think a company is going to invest below the cost of capital this should/will detract from value; but if this were the case you probably would pass on the investment for lack of confidence in management.)

 

Last point: The key questions needed here are: 1. Since management is choosing to reinvest, do I trust management with capital allocation, do they have the right approach and owner mindset? 2. Approximately how much cash is going toward growth, either in the form of additional marketing, capital expenditures, and/or acquisitions?

Great post

[KCLarkin]

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

 

Looks like he was a big buyer after the selloff. Now holds 3,790,361 shares.

http://www.sec.gov/Archives/edgar/data/1262976/000117266115001453/cmpr073115a6.htm

[Guest Grey512]

That's splendid.. Noticed weird uptick (volume-driven?) after the sell-off.

Anyone know whether Arlington (Allan Mecham) bought more?

 

[KCLarkin]

Anyone know whether Arlington (Allan Mecham) bought more?

 

He would need to buy a large amount to pass the 5% reporting threshold. I think he would need to increase his position >50%. We will know in 3 months when he files his 13F.

[kab60]

Anyone have a short thesis?

[ScottHall]

Anyone have a short thesis?

 

Its business is based around selling old-economy kitschy "marketing" BS like business cards?

 

 

JK; no opinion on the stock or company.

[kab60]

Gross margins are pretty good om that stuff. :) And who wants to compete in old economy?

[KCLarkin]

The obvious short thesis is that business cards will become obsolete because of smartphones and LinkedIn. But the short interest is so high, there has to be a stronger bear case. That seems likely a shaky bet against a company growing so quickly.

[kab60]

I didn't read this anywhere else (might have missed it) but it says in the 10K filed Friday that they bought back ~1,03m shares between June 31th and August 13th. They bought at less than 70$ a share so they must have bought it after their earnings announcement and the large dip meaning they reduced total shares outstanding 3 percent in ~two weeks. I like that (and have already initiated a position).

 

[Txvestor]

I didn't read this anywhere else (might have missed it) but it says in the 10K filed Friday that they bought back ~1,03m shares between June 31th and August 13th. They bought at less than 70$ a share so they must have bought it after their earnings announcement and the large dip meaning they reduced total shares outstanding 3 percent in ~two weeks. I like that (and have already initiated a position).

 

 

Where in that report did you find that? It was 130 pages and I skimmed through it but didn't see where it said that. It looks like they have board authorization for 6.4M shares as of June 30th, so they might keep buying. Keane did clearly mention in his investor letter that compared to 3 of their acquisitions in recent years, they woul've been better served having used the opportunity to buy back shares when they were trading below its intrinsic value. I saw that to be an honest admission. And I guess after that exchange with Greenberg about the WACC and returns generated on investments recently, they mighht be giving greater consideration to this as an investment option. Interesting that Brave Warrior Advisors has also added shares significantly since june 30th.

[kab60]

Buried in the notes:

 

20. Subsequent Event

 

Pursuant to the share repurchase authorization approved on December 11, 2014 we have purchased 1,027,625 of our ordinary shares subsequent to June 30, 2015 and through August 13, 2015 for a total cost of $69,751, inclusive of transaction costs.

 

[AccentricInv]

Buried in the notes:

 

20. Subsequent Event

 

Pursuant to the share repurchase authorization approved on December 11, 2014 we have purchased 1,027,625 of our ordinary shares subsequent to June 30, 2015 and through August 13, 2015 for a total cost of $69,751, inclusive of transaction costs.

 

Excellent spot, thanks.  Looks like they bought back at $67.88.

[Guest notorious546]

What do you guys estimate fair value for the shares at? looks like they have appreciated at an good rate since the last announcement. I haven't seen anything notable over the past month for insider sales or purchases.

 

 

[KCLarkin]

CFO poached by Tripadvisor. Big loss:

http://seekingalpha.com/pr/14937316-tripadvisor-names-ernst-teunissen-as-chief-financial-officer