Vistaprint: The Case For Shorting The Stock Has Strengthened

| About: Cimpress N.V. (CMPR)
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A few months back, I wrote a lengthy article about Vistaprint (VPRT) and how the company was significantly overvalued and would soon be resetting the bar on its growth outlook during the summer of 2013 at its next analyst day. Since the time of that article, the stock has run almost 25% higher on absolutely zero news or catalysts:

VPRT Chart

VPRT data by YCharts

This latest run has left the stock in absolute nosebleed territory. The company previously guided for GAAP EPS for the current fiscal year (period ended 6/30/13) of $.60 - $.80. I previously noted the absurdity of the fact that the company had 3/4 of the year in the bag yet had such a wide range for its earnings guidance as evidence of the volatility surrounding the outlook for the business. It would appear that my previous call was a bit early, but the foundation of the analysis is just as relevant today as it was then. Vistaprint is trading at nosebleed valuations and is going to have to significantly lower its long term outlook when it gives its 2014 guidance either during the July earnings call or at the investor day shortly thereafter. The market has continued to treat Vistaprint as a growth stock, and if the company lowers expectations as it appears will be the case, this house of cards could quickly come tumbling down. Vistaprint easily could have over 30% downside from the level at which it currently trades.

Valuation

Vistaprint is a big fan of reporting adjusted GAAP earnings, most likely because its actual GAAP earnings are materially lower than the adjusted numbers the company wants investors to focus on. To humor the company, let's forget about EPS for a minute and consider the valuation metrics looking at FCF, EBIDTA, and EV/EBDITA. From a FCF perspective, you can see from the Q3 2013 earnings report shown below that FCF has plummeted through the first 9 months compared to the PY:

The company saw FCF plummet from ~$84M to ~$31M on a YoY basis as seen above. A portion of this decrease can be pawned off as investments in future growth by way of capital expenditures, but the balance is directly tied to decreased cash provided by operations which speaks directly to the current state of the business. The company generated a total of ~$88M of FCF in FY2012. Even if you assume that the company is able to return to that level in FY 2014, which would assume that the company almost doubles its FCF level from FY2013, the valuation from a FCF yield standpoint is outrageous. With a market capitalization of ~$1.6B, assuming ~$88M in FCF for FY 2014 (equivalent to what the company delivered in FY 2012), the equivalent FCF yield is equal to 5.5%, which is entirely unattractive for a supposed growth company.

Turning to EBIDTA, the following two tables from the Q3 2013 earnings report show the necessary operating metrics required to calculate EBIDTA:

Income Statement

Statement of Cash Flows

Through 9 months, the company generated $43M in income from operations (down ~14% from the prior year) and incurred $47M in depreciation and amortization costs. During the Q3 2013 earnings call, the company CEO indicated that the GAAP EPS guidance for Q4 implied a net loss for the company at all but the highest point of the guidance range:

And you're correct, if you look at the fourth quarter, you see that there is, on a GAAP basis, the parts have arranged [ph] actually indicate potential loss and that is because we have some expenses in the fourth quarter.

Given this guidance, it is probable that operating income will be negative in Q4. Giving the company the benefit of the doubt and assuming that operating income actually comes in at break even, and annualizing the depreciation and amortization expense, EBIDTA for FY 2013 would be ~$106M ($43M in operating income + $47M YTD Depr/Amort + $15.6M Q4 Depr/Amort). With estimated operating income just north of $100M for the current fiscal year, Vistaprint is trading at almost 16x EBIDTA.

Lastly, turning to a EV/EBIDTA valuation, the valuation picture is just as bleak. The table below shows the Vistaprint balance sheet as of Q3 2013:

As noted in my previous article about the company, Vistaprint has recently chosen to deploy the majority of its cash on share repurchases and acquisitions. In doing so, it has also taken on over $230M in debt over the last 2 years. The Enterprise Value of Vistaprint currently can be calculated as follows:

  • $1.6B Market Cap + $230M Debt - ~$50M Cash = $1.78B

On an EV/EBIDTA metric, as the company has levered up for what has so far proven to be nothing more than an exercise in propping up EPS, the valuation metric looks even worse than it does when simply valuing the company off its Price to EBIDTA ratio. The EV/EBITDA ratio for Vistaprint currently stands at ~17x.

Every valuation metric shown above shows how overvalued Vistaprint is today. Even if the company were to manage to continue growing revenue and expand its EBDITA margin at a material rate each year, shares would be materially overvalued using a DCF analysis. For example, the adjusted EBIDTA % for FY 2012 was 13.2% (adjusted to also exclude stock based compensation). If you assume that this metric expands to over 18% by 2017, assume flat revenues over the next 10 years and terminal growth rate of 3%, and a discount rate of 12%, a DCF analysis would derive a current fair value of close to $32 per share which is 30% below where the stock currently trades.

Investment Outlook

One lever that the company has hinted at that it can pull to drive earnings, or EBIDTA, is to cut back on advertising spending where the company is not realizing a favorable return on its investment. Robert Keane, Vistaprint CEO, had the following to say when asked about advertising spending on the Q3 2013 earnings call:

Just to be sure, your first question, we are not taking our foot off the gas in terms of investment that are meeting our hurdle rates. We have pulled back on advertising a bit where we found that we were spending in programs that were not where we wanted them to be

The problem for Vistaprint is that its revenue is highly correlated to the amount of advertising its spends, as its retention rate or % of business from returning customers is very low. In other words, the company is dependent on consistently drumming up new business to keep feeding the machine as customers do not often stick around. The table below shows the implied retention rate of customers at Vistaprint on a trailing twelve month basis:

The company has seen its implied retention rate fall from 44% at the end of Q4 2012 to 41% at the end fo Q3 2013. Notwithstanding the fact that a declining retention rate is a negative sign in and of itself, this chart shows how dependent Vistaprint is on constantly drumming up new business. Said another way, if the company were to shut off the advertising machine, it is very likely that it's highly correlated revenue would decline in line with lower advertising spending.

The counterpoint to shorting Vistaprint would be that the company offers the best in class manufacturing process which leads to gross margins well above 60%. If the company were able to continue to leverage this level of gross margin, and somehow begin to retain more customers, it is feasible that operating margins could rise. However, as noted above in the DCF valuation provided, Vistaprint could see it's adjusted EBITDA margin grow by over 35% from the level seen in 2012 over the next 5 years and shares would still be overvalued by 30% today. Vistaprint has seen its trading volume plummet by 50% over the past 60 days and its short interest fall by almost 13% as shown below:

I strongly believe that the recent move higher in shares of Vistaprint is nothing more than a light volume rally driven by short covering, and the stock is sitting on a ledge ready to fall hard no matter what management says when it provides 2014 guidance and an updated long term outlook at the investor day in August.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.