Today's Buy Opportunity: Vistaprint

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Seeing that the writer and poet Oscar Wilde once quipped, "Any fool can make history, but it takes a genius to write it," I'm sure even he would drop a few dollars on my pick for The Motley Fool's "11 O'Clock Stock": Vistaprint (Nasdaq: VPRT  ) -- a company brilliantly printing its way into history one small business at a time.

Vistaprint fast facts:

Market capitalization

$1.5 billion

3-year revenue growth (annualized)

37.8%

5-year revenue growth (annualized)

49.1%

Cash & investments | debt

$172.3 million | $5.2 million

EV / EBITDA

10.8

Source: Capital IQ, a division of Standard & Poor's.EV is enterprise value, which nets out the company's debt and cash position. EBITDA is earnings before interest, taxes, depreciation, and amortization.

Vistaprint, the leading online provider of marketing products, literally built its emerging empire on the backs of regular old business cards. Its successful campaign of offering free business cards (with its logo on the back) has proven to be a low-cost way to spread word of its printing prowess, turning customers into unwitting marketing agents, to the tune of more than 4 billion cards distributed.

While business cards once dominated Vistaprint's business, they have shrunk to about 30% of revenue. Vistaprint's goal is to become the online source of "all things marketing" to the micro- and small- business community -- offering everything from signage and stationery to marketing materials and promotional items (i.e., tchotchkes). Vistaprint has even begun to meet its clients' digital marketing needs by providing low-cost websites and email marketing campaigns.

Why Vistaprint?
So why does some glorified online print shop deserve our hard-earned dollars? Here are my top five reasons, in no particular order, why Vistaprint is a larger force than the market is currently giving it credit for.

1. Alpha-dog status
While Vistaprint didn't invent the online printing business, it's out to dominate it. By the company's own estimates, they are multiple times larger than their closest competitor. That's very impressive given that the $100 billion U.S. commercial printing industry is fragmented among 35,000 different players -- with most having revenues of less than $5 million. Vistaprint has been able to grow quickly within this cluttered field by focusing on the marketing needs of microbusinesses, which the company estimates is a $25 billion opportunity (between the U.S. and Europe). Even FedEx (NYSE: FDX  ) Office and OfficeMax (NYSE: OMX  ) have decided that it's easier to partner with Vistaprint than try to beat them.

2. Patently awesome
While the barriers of entry into general printing may be relatively low, Vistaprint's ability to dominate the mass customization of microsized orders is uncanny. With more than 40 patents issued, 50 pending, and more than $250 million spent in research and development, the company is not shy about taking potential infringers to court.

3. Opportunistic operator
Vistaprint still has its founder, Robert Keane, running the show. Keane is a Bezo-esque type of leader who hatched the original plan for the company during his time at INSEAD – The Business School for the World. He is an opportunistic leader who reframes problems into potential opportunities. For instance, in late 2008 when the company's stock price dropped precipitously, he engineered a massive $46 million dollar buyback at an average of $17.82 per share, which proved both rewarding and timely.

4. Going commercial
While Vistaprint isn't a household name – except maybe for those operating home-based businesses – it's started to leverage its existing infrastructure in order to capture those small, family-centric printing needs. While the company entered the market to help smooth out the seasonally weak holidays, the move also exposes its growing product offerings to a wider audience base. Add in its small, national television campaigns, and Vistaprint might be on the way to earning a spot in the family circle of trust.

5. Miss-underestimated Opportunity
After missing revenue expectations and guiding fiscal 2011 estimates lower, shares took an absolute drubbing, falling 36% one day last week. While extremely high expectations were built into its recent $62 stock price, at $32.80 the market is seriously underestimating Vistaprint's current and future earnings power growth.

Printing money, printing growth
No matter your opinion of Vistaprint, you cannot argue with its amazing history of profitable growth. The company has grown from $6.1 million in revenue in 2001 to $670 million for fiscal year 2010. That's a 69% compounded annual growth rate -- all done organically.


And not only did Vistaprint grow, but it did so profitably -- and increasingly so. While competition among major commercial printers tend to limit profits, Vistaprint's proprietary print technology has allowed it to compete as a low-cost producer while still achieving operating margins that would make your local printer envious.

Oh, did I mention that the company has done this with a balance sheet that has gone from lean and mean to absolutely pristine? Cash and short-term investments have mushroomed from $3.1 million to $172.3 million over the past seven years. While Vistaprint's growth has come all organically, this war chest leaves it able to make strategic acquisitions in the future -- see Vistaprint's 2010 acquisition of custom embroidery company Soft Sight.

With Vistaprint, you have a company with an enterprise value / EBITDA of about 11, growing at more than 20%, with a rock-solid balance sheet. Add in an additional 1.6 million new customers during last quarter and a reliable revenue base comprised of 67% repeat customers, and you've got the makings of company on a mission.

The last company I've seen that has been able to create such obscene growth opportunities within a relatively staid industry was Amazon.com (Nasdaq: AMZN  ) , which dove into the relatively benign and boring book sales business and leveraged its online leadership to become one of the fastest-growing retailers in the world. Sure, history may not repeat itself, but it sure does rhyme. And with the recent drop in Vistaprint's stock price, it sure sounds a lot like a multibagger investment in the making.

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Stock Advisor and Special Ops analyst Andy Louis-Charles owns shares in Vistaprint. You can follow Andy on Twitter @TMFAloha. Vistaprint is a Motley Fool Rule Breakers choice. Amazon.com and FedEx are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2010, at 12:01 PM, XMFAloha wrote:

    If anyone has any questions about Vistprint (VPRT), small businesses, or lithography please post them here. I'll do my best to answer the substantive ones and artfully dodge the ones on microlithography and nanolithography.

    Again, thanks for taking the time to read this article ... actually, this is such a good pitch, you should probably be thanking me... either way "Your Welcome" and let the questions fly.

  • Report this Comment On August 06, 2010, at 1:13 PM, mikecart1 wrote:

    Why is this stock recommended when it took like a $20/share hit just a few days ago? Is this a joke recommendatioN?

  • Report this Comment On August 06, 2010, at 1:19 PM, shivy1 wrote:

    I believe the author thinks the drop is overdone. Also I hope you are kidding about being cocky in your comment. Anyways the company is good, but I definetely would not consider a multibagger, I think it could prob hit $50 but still have to do more research on it.

  • Report this Comment On August 06, 2010, at 1:31 PM, scanlin wrote:

    I like the at-the-money covered calls on this one. Buy at 32.85; sell Aug 32.50 call for 1.10. Net debit of 31.76. With 2 weeks left to go you can make over 50% annualized return if called. If not called sell a Sep 32.50 in a couple weeks.

    MikeS

    http://www.borntosell.com

    covered call investment tools

  • Report this Comment On August 06, 2010, at 1:33 PM, VossPiety wrote:

    Citron took vprt to the wood shed last year (http://citronresearch.com/index.php?s=vprt&submit=Search... over worries vprt could lose their referral income. Any merit to Citron's thesis?

  • Report this Comment On August 06, 2010, at 1:56 PM, MegaEurope wrote:

    Your claim that their patents and r&d prove they are willing to litigate seems to be a non sequitur.

    Anyways basing investment decisions on litigation is usually a miserable idea.

  • Report this Comment On August 06, 2010, at 1:59 PM, luvb2b wrote:

    Interesting article, but old revenue and margin figures were all based on having subscription income. I posted my comment below in my portfolio underperform recommendation. Curious your thoughts:

    I was considering to buy this stock after the drop, but discovered some interesting negatives while conducting my research. The biggest is that the company was jamming subscription membership programs down the throats of unsuspecting customers. You can Google VistaPrint complaints and you'll get the idea real fast. The company decided to discontinue this practice last fall. It turns out that scamming money for subscriptions has a very high gross margin. The last two quarters the revenues fell off sharply, and so did the margins. Those margins and revenues are not going to come back, unless they come up with a new way to scam customers into paying for subscriptions. Those subscriptions basically goosed the revenue and margin figures over the last year or two, so historical comparisons are not really relevant. The other interesting item is that they are adding a plant in Australia. Australia? This is one of the highest cost places to do business in the Asia-Pacific region with minimum wage around $15 per hour. This plant has to hurt margins and I can't explain why they would not have put it in Malaysia or Thailand instead. Finally the earnings estimates here are totally screwy. The company issues huge amounts of stock/options every year but it seems analyst estimates are based on non-GAAP figures which exclude stock based compensation. The true future earnings power of this company is less than $2 per share on a GAAP basis, and frankly I'm not even sure it will do anything close to that because of the margin pressures they will face. At $35 the market is valuing the stock around 2x projected sales and 20x forward EPS when they are running single digit net profit margins and flat to declining revenues. For now they blamed their profit and sales shortfall on currency fluctuations, so it may take one or two more quarters for everyone to see how low the margins really are and that prior growth was partially manufactured by duping customers into paying for subscriptions. There are much better quality technology companies available at these valuations today.

  • Report this Comment On August 06, 2010, at 3:33 PM, Melaschasm wrote:

    Low debt, ROI and ROE nearly 20% are all impressive results.

    A P/E over 20 isn't great, but sometimes you have to pay for quality.

    Revenue growth during and before the recession is a very big positive.

    A margin squeeze in 2010 makes me nervous. A two star CAPS rating has me even more concerned.

    Can the new lower margin be maintained as sales continue to grow? Will the margin return to its previous levels?

    If the margin squeeze is the result of the subscription issue mentioned above, then it looks like the new margins could be maintained. It may take a year for profits to resume strong growth, but at least the possibility exists.

    This looks like a decent stock, but I think I can find better deals. If the margins hold steady or improve in the next quarter, then I will recomend buying.

  • Report this Comment On August 06, 2010, at 4:08 PM, scanlin wrote:

    I like the at-the-money covered calls on this one. Buy at 32.85; sell Aug 32.50 call for 1.10. Net debit of 31.76. With 2 weeks left to go you can make over 50% annualized return if called. If not called sell a Sep 32.50 in a couple weeks.

    MikeS

    http://www.borntosell.com

    covered call investment tools

  • Report this Comment On August 06, 2010, at 4:32 PM, XMFAloha wrote:

    mikecart1,

    Can you clarify your comment / question? Are you saying any stock that falls dramatically can't possibly be a buy?

    Cheers,

    Andy

  • Report this Comment On August 06, 2010, at 4:35 PM, XMFAloha wrote:

    Shivy1,

    I think the long term growth prospects for the company are very favorable, so if this stock does multi-bag, it will be over time.

    And yes, I was kidding. I've had the market punch me in the nose enough times to know that investing is a probabilistic endeavor and that all we can do is make sure we are properly compensated for the risks (investments) we take.

    Cheers,

    Andy

  • Report this Comment On August 06, 2010, at 4:41 PM, XMFAloha wrote:

    VossPiety,

    Yes, I have read the Citron report. Their comments about the referral revenue / income was correct in a particular moment in time, but if you read the report carefully, you will see absolutely no analysis of the core printing / marketing business.

    I would simply ask them, "okay, assuming all your points are correct, what is the core business worth?" That's a conversation I believe would better aid investors in making a decision on the stock.

    Cheers,

    Andy

  • Report this Comment On August 06, 2010, at 4:53 PM, XMFAloha wrote:

    Hi MegaEurope,

    Yeah, we have limited space to print these write-ups. If I had a bit more space, I would have mentioned that they actually have gone after potential infringers:

    From the 10K:

    "We have commenced in the past, and we expect to commence again in the future, litigation against third parties to enforce patents issued to us or to determine the scope and validity of third-party proprietary rights. For instance, in May 2007, we filed a lawsuit in Federal District Court in Minnesota alleging infringement by 123Print, Inc. and Drawing Board (US), Inc. of certain U.S. patents owned by us, and since that time have expanded the lawsuit to include Taylor Strategic Accounts, Inc., a related party to 123Print, Inc. and Drawing Board (US), Inc., as an additional defendant. Similarly, in July 2006 we brought litigation in the Dusseldorf Germany District Court alleging infringement by print24 GmbH and unitedprint.com AG of a German patent owned by us."

    Also, just to clear things up, my thesis on the stock is not contigent on the patents, but if I had choice between a company with intellectual property and one without it... give me some yummy IP.

    Cheers,

    Andy

  • Report this Comment On August 06, 2010, at 4:54 PM, luvb2b wrote:

    Andy, something that was helpful to me in evaluating what the stock was worth was CAPS commentary by bfaulkner87 dated November 16, 2009. I'll just copy/paste the relevant sections below.

    I don't know about the tax rate comments he made, but you could back out the referral margins out of the old numbers and get a better picture of earnings and valuation. It is definitely a significant issue.

    Printing has historically been a low margin business. Applying a "new model" with lower prices can't change that. The subscription gimmick did fool a lot of people though.

    bfaulkner87's comments:

    "Vistaprint downplays the referral revenue’s significance by comparing it to their revenue, not their net income. In the latest quarter this amounts to 3.5% of revenue and they predict that it will account for between 2-4% of revenue going forward (assuming there's no legislation banning this practice). However, there is no cost associated with these referral fees and they flow down to the bottom line unaltered. So in the latest quarter on a net income of $12.9m about $5m of that comes from these referral fees. The insubstantial 3.5% of revenue is a whopping 36% of pretax income....and that's just in this quarter. Over the last 12 months Vistaprint has generated $25.2m in referral fees compared to $61.1m in pretax earnings. That’s 41.2% of their annual pre tax earnings. For the fiscal year ending the same date in 2008 their referral fees were $27.6m on pretax earnings of $44.1m or an incredible 62.5%.

    ...

    If you eliminate these referral fees, which are at best poor business practices and at worst, illegal, and apply a reasonable tax rate given that 60% of their business is done in the U.S. their legitimate earnings are about $22.5m on a company with a current market value of $2.3 billion. So the lofty 40x earnings actually becomes about 100x earnings less referral revenue at a 35% tax rate.

    ...

    To make things even more interesting their CEO, Robert Keane, has sold off 88.7% of his stake in the company over the last 12 months two of the largest sales--87,800 between 5/22/09 and 6/1/09, and 44,500 on 11/5/09--coming within 1 week of the letters from the Commerce Committee to Vertue 5/29/09 and Vistaprint 11/6/09.

    http://quote.morningstar.com/insider-trading/Insider-Activit...

    Keane seems like a savvy businessman. He grew his business from 6m in sales in 2001 to 520m in sales in 2009. I’d follow his lead and sell VPRT common at anything above a 20x non-referral, fairly taxed earning power, or roughly $12/share. At $54 there is significant downside potential."

  • Report this Comment On August 08, 2010, at 11:28 PM, donbcms wrote:

    VistaPrint - My 1st dealing with them; Business Cards - illegible! 2nd time -rubber stamp w/pad, great price, but again, illegible! 3rd time (through a friend) advertising magnets & material, again cheap price BUT CHEAP PRODUCT! Sucked in by the price. But NO Re-Orders.

  • Report this Comment On August 10, 2010, at 12:06 PM, mikecart1 wrote:

    Andy,

    The stock dropped not only because of past revenues but also future revenue potential. This stock is going down and buying it would be the worst choice of all time.

  • Report this Comment On August 18, 2010, at 12:02 PM, mikecart1 wrote:

    It is Aug 18th and the stock is in the 20's now. I say no to Vistaprint.

  • Report this Comment On August 23, 2010, at 10:13 PM, tekennedy wrote:

    Just finished due diligence. Posted this on luvb2b's wall:

    "Just finished my own due dilligence. I liked a lot about the company and almost didn't look twice regarding the "third party membership discount programs"(3PMDP). The company in the past annual report had stated that "revenue from membership discount programs will decline...possibly to as low as zero" and had ended the practice during the quarter ended Dec. 31, 2009 and had their first "honest" quarter ending Mar. 31, 2010. They had actually posted figures giving these deceptive revenues as a percentage of total revenues in the past and yes it has had a garguantuan impact over the last 3 years...

    2009 2008 2007

    Total Revenue 515.8 400.7 255.9

    3PMDP% of total 3.9% 6.2% 7.8%

    3PMDP Revenue 20.1 24.8 20.0

    Stated Earnings 55.7 39.8 27.1

    Impaired Earnings 35.6 15.0 7.1

    These imply a 100% gross margin on this revenue which probably isn't too far off the mark but I expect real earnings excluding 3PMDP revenues and expenses to be slightly higher. The latest quarterly being the first without those charges shows the hurt it puts on margins as net margin fell from 11.1% to 9.7%...but EPS rose from .33 to .37. The tremendous growth this company is experiencing may lead to these bogus charges just being a bump in the road.

    That being said there are a few other concerns I have. 1) the company has misstated past share based compensation. Although minor at $1.3 mil I worry that this may be more symptomatic of a make-the-numbers-work culture, 2) I am unsure of the tax structure laws but the company engages in "transfer pricing agreements" with subsidiaries where one portion of the company pays another for services. It appears this has the effect of syphoning costs from high tax areas such as the US to low cost(actually no taxes in fact as its in a tax free zone) areas such as Jamaica. I am unsure of common tax law but I expect, if the US desired to do so, this practice could be prevented in the future.

    To summarize... I think this truly is a well run company with competitive advantages which should contine to experience growth. The past actions, although making me question management's decisions, don't prevent me from looking to buy the company. The strong financial condition the company is in($150 million or so in net cash) combined with strong growth give me a buy target between $900 million and $1 billion or $20-22/share. I would seriously reconsider a short position and if unsure reccomend stepping aside"

    Figured I'd post it here to let more people get a look. As an aside it looks like they may have started these membership discount programs around 2006 based off of those op margins. Backing out those revenues actually helps paint a rosier picture for op margin expansion in the future even. Still seems like an interesting investment.

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