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Vistaprint (VPRT): The Makings of a Moat?

February 16, 2012 | About:
Geoff Gannon

Geoff Gannon

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Someone who reads my articles sent me this email:

Hi Geoff,

I am doing my quarterly 13-F review and the first thing I stumbled onto when looking for info on Vistaprint (VPRT) was your article on Glenn Greenberg.

I didn't realize that you also look at this type of company.

Looking through some investor presentations, I’m not really convinced that they can maintain current growth rates of 20%.

Their production facilities are all based in high cost developed nations.

Why could this not be copied in Asia?

I just don't see the moat.

Current valuation assumes double digit performance for several years, one small dip and the stock dives, no margin of safety here...

Regards,

Rijk

You bring up an interesting point about cost. But I’m not sure how much a small price differential matters to customers in this kind of business. I would have to look into that. Any logistical problems would lose you a customer. Also, that assumes the lowest labor costs lead to the lowest production costs – I’m not sure that’s true in the printing industry.

I’ve had business cards printed. And screwed up (not by Vistaprint). As long as the price was reasonable, I would’ve gone with “the best”. And I would’ve had no way to know who “the best” was other than the most recognized name. Actually, I remember that being the problem when I needed some business cards, company stationary, etc., printed. I had to visit a couple websites. Look at them. Try to guess which was the best. Or at least decent. It was like getting a plumber or something. I had very little ability to separate the good guys from the bad guys. I wasn’t spending time thinking about price – many printers had prices that seemed awfully similar to me. Instead I was just overwhelmed how frustratingly identical all the choices were.

I had no way to make an informed decision.

I can certainly imagine ways of saving money. But I really doubt labor is a good place to try to find those savings. Small orders to small customers that need to be timely are the thing low-cost Asian countries don’t do well.

Take George Risk (RSKIA). All of their competitors moved overseas. They’re still in Nebraska. Management doesn’t really claim they can either be better or cheaper than their competitors. They know they can’t be cheaper. And as far as better – this isn’t dark chocolate they’re selling. Beyond customization, timeliness, and reliability – I’m not sure the idea of “quality” has much meaning in that business. It’s either frustration-free or it’s not. The two things George Risk can be are timely and customized. Both of those things are easier to be – for American customers – if you are manufacturing in the U.S.

The easiest thing to offshore seems to be mass-produced copies.

I know someone who works in the (high end) shoe business who is constantly traveling to China. He tells me that if you bring an actual new shoe over to a factory in China you can start mass producing it in no time. But if you try to make the slightest alteration after the fact – telling your guys in China to tweak some little thing with the design – the results are disastrous. His company experienced some production fiascoes at first. So now they never try to tweak anything. They always make sure there’s an exact copy on site. And they don’t change any detail – ever. Everything has to be perfect on their end before it goes to China. If changes need to be made – they get made in the U.S. without suggestions from over there. Apparently, this had not been the normal procedure for production in the U.S., Italy, Brazil, etc.

Not sure why this is. But I think the companies that had trouble with moving production to Asia have been businesses that needed at least a modicum of customization. Standardization is what Asia does really well right now.

Overall though I don’t think costs are going to be the most important part of this a printing business. Certainly not labor costs.

It’s an image business. If you screw something up that has to do with your customer’s image – which is a lot of Vistaprint’s business – you alienate that customer.

Costs are important. But what’s the trade-off between dollar costs to the customer and costs that come in the form of a lack of customization. Can a printer really try to cut costs by sacrificing customization?

That doesn’t sound right to me.

Also, I think the business scales really well. It’s really expensive to compete for new business. Repeat business is easier for little, local guys to do well. But this is a business – because of the huge number of small businesses, their failure rate, etc. – where you constantly have first time customers who are doing their first ever product search. This is an industry with churn. Old businesses fail – new ones start up. Every year. Won’t people use the service they’ve heard of? I’m not sure how you get your name out there. How you get to the top of Google, etc. if you are a competitor of Vistaprint.

None of the individual orders – or customers – are very valuable. Being the go-to source for some totally new business is key. Basically, you want to be the first guy a new business owner orders from for the first time. I think that’s the key to this business. If you get that first look – you’ll have success. If you don’t – you won’t. So if the economics of the orders works for you at the same time you have the kind of profile that gets you that first look – I think you’ve got a recipe for long-term profitable growth.

As far as the rate of growth, I don’t know how sustainable it is. That’s a really high growth rate. Vistaprint has talked about 20%. It’s hard to predict how achievable that kind of growth is. They probably aren’t going to have the same growth rate they had in the past. We certainly can’t assume they will.

But I don’t know if the price really is factoring in a huge growth rate. It’s definitely factoring in growth. But the current stock price isn’t assuming blistering growth.

Predictable, profitable companies are worth a high multiple even if they are pretty slow growers. Vistaprint is the kind of company that could be very stable and very predictable at some point. Even when the growth stops – Vistaprint could end up a very steady business. And it could end up with the kind of multiple very steady businesses get. That sort of multiple isn’t much lower than where Vistaprint’s stock is trading right now. Today, there’s maybe a 50% “growth premium” in the stock. In other words – Vistaprint shares might be about 33% lower if its growth prospects were no better than anybody else’s.

Does that mean there’s a margin of safety?

Absolutely not. There’s no quantitative margin of safety in Vistaprint’s shares. But Glenn Greenberg likes businesses he can buy and hold that are trading at a fair price. Greenberg’s margin of safety is always the business. It’s rarely the price. I don’t think he wants to own an average business trading at a great price. I think he wants to buy a great business at an average price. In this case – I’d say it’s an above average price. I mean, there are certainly good companies trading for less right now.

But highly fragmented businesses where competition is from local small businesses are the easiest to grow for a long, long time. It’s the Starbucks (SBUX), Barnes & Noble (BKS), etc. formula. It’s really easy to grow against local competition. It gets hard when you start facing the same (large) competitor across all geographies.

I think there’s the potential for a durable moat in this kind of business. I’d have to study Vistaprint. But this kind of business has an immediate appeal to me.

The more I read about Vistaprint the more of a moat I see. I think the idea that you could use cheaper labor actually illustrates a point here. That’s not what matters. It isn’t the labor that matters. It’s applying the principles of mass production to small orders. Vistaprint is really about reconciling those two things. Getting small orders to work smoothly for the customer and large production to work smoothly for Vistaprint.

I think I'm getting an idea of the importance of reconciling the taking of small orders from the customer with the use of huge production facilities. Printers really need both. So the printers with the lowest costs – historically – couldn’t take small orders. And the folks who could take small orders couldn't be world class when it came to production costs.

The internet solves this.

Vistaprint may be an example of Warren Buffett's idea that sometimes it's better to invest in the company that benefits from some technology (like GEICO) than to invest in the company that pioneers that technology (phone, internet, etc.).

I haven't had enough time to really delve into Vistaprint as a possible investment. I hope to this weekend. But I am intrigued by the possibility of a moat here. I've been reading about their production facilities. And the centralized way orders are handled. These are some really tiny orders going to really huge production facilities. Reading about the facilities orders are routed to has got me extremely interested in the stock.

Vistaprint has the kind of business strategy I look for.

This one goes to the top of my research pile.

Talk to Geoff About Vistaprint (VPRT) geoff@gurufocus.com

About the author:

Geoff Gannon
Geoff Gannon


Rating: 3.6/5 (21 votes)

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Comments

ssg280
Ssg280 - 2 years ago
Prior to Q4 earnings the stock was trading at ~$30, and has run up ~30% since then. My conservative DCF, estimates that VPRT is worth $45 - $55 per share (11-12% WACC / 3 - 4% Perp). I believe my WACC (essentially the cost of equity since the company has no debt) is conservatively high. The market risk premium is likely lower than my assumption.

My model has revenue growth of 24% and 20% in 2012/2013 (consensus), and then declining from 15% in 2014 to 12% by 2021. Given the size of the market opportunity (micro businesses) and international scope of the VPRT's operations, I believe low double digit growth is easily sustainable.

I have EBITDA margins moving from 20%+ historically to 13.5% from 2012 through 2021. This is a conservative assumption in my opinion.

Taxes are also important in forecasting cash flows for VPRT - the company has historically paid a ~10% effective cash tax rate That number is expected to double in 2012 to 20% due to their tax methodology - however it is expected to decline again to ~10% within 5 years (for more detail , read the 10-Q / transcripts).

At $30 (where I entered), there was a great margin of safety. I'm not sure I'd enter at $40 today given my estimate of fair value. I intend to hold as I believe in the story and management team, and am comfortable that more upside exists.
batbeer2
Batbeer2 premium member - 2 years ago
My model has revenue growth of 24% and 20% in 2012/2013 (consensus), and then declining from 15% in 2014 to 12% by 2021.

12% growth in 2021... nice !

1) What happens if the US postal service gets privatized in say.... 2020 ? For businesses, they start charging a percentage of the value of the package. As it is, Vistaprint is making money while the "company" that delivers their product is basically bankrupt.

2) You buy a camera nowadays and it has wifi.... great ! What if Canon decides to eliminate old-school storage on their cameras and "go 100% cloud". Are you going to download your pics from canon and upload them to Vistaprint or are you going to give Canon's service a try ?

I'm not making this up... HPQ is doing this stuff.


-EDIT- Don't get me wrong, Vistaprint may well go up tenfold from here. I'm just pointing out two risks I can think of. Those are probably not the ones that matter.

That's why you need a margin of safety.
SapientInvestor
SapientInvestor - 2 years ago
Its an interesting moat and could last for a while. It is not unimaginable to see a large competitor come in offer a similar system and steal business but seems unlikely. It is hard to say how sticky the consumer is to the product. They may feel if something works why change unless price is that much different. Right now though its a unique asset with a lot of room for growth. I wish the business structure was simpler and they were paying a normal tax rate so that would be fully priced in.
ssg280
Ssg280 - 2 years ago
Batbeer2 - Thanks for the response.

(1) In regards to the 12% growth in 2021, I feel that is a reasonable figure with some confidence. Obviously, it's a phantom # in the future; however given the pace of organic growth by the company over the past 5 years and the company's five year plan (which I believe in given the strong management team), 12% sounds fair. Even assuming organic growth declines to single digit #s, the company has significant leverage capacity that it can utilize down the road (has zero debt right now). Cash and/or leverage could be used for strategic acquisitions (i.e. recent Webs.com acquisition) or returning cash to shareholders. Inorganic growth factors into my 12% rate by 2021. Also VPRT is just touching the surface of the addressable market.

Furthermore, a large portion of the valuation is held in the terminal value (typical of DCFs). 3.5% perp is conservative for a company of this nature.

(2) Your question on shipping risks intrigued me. So I called the company (scuttlebutt much?).

Common Shipping methods offered by the company (US):

< 3-day (UPS only)

7-day (USPS or UPS) - Roughly 50/50; depends on customer location.

14-day (USPS only)

Per the person I spoke with at VPRT, the 7-day method is the most common choice of customers. Which makes sense...who's really going to wait 14-days. Seems like the company is already reliant on a privatized shipping company.

I believe privatization of the USPS will eventually be more efficient and better for both businesses and consumers. Don't believe this is a significant risk.

(3) Regarding cloud issues, I agree that it's something to think about...but not for too long. First a very large majority of VPRT's business is from micro businesses. General consumers are a new target market but really don't contribute much to the top-line.

Assuming the above was not true, it would cost canon a lot of time, effort and money to do what VPRT does. And could they even do it effectively? Staple thought it could...then it partnered with VPRT (recently). Now there are / will be VPRT kiosks in over 2k staples locations to deal with the needs of microbusinesses.

batbeer2
Batbeer2 premium member - 2 years ago
Thanks for the scuttlebutt & thoughts. Indeed, the balance sheet looks solid. Always a good sign.

Come to think of it.... I don't believe a Dutch company can have a moat ;-).

ssg280
Ssg280 - 2 years ago
I got some more detail on the Staples partnership by speaking with VPRT's IR dept. They were very responsive - which I take as a positive sign.

It is a white label agreement. VPRT's logo does not appear on Staples.com or in Staples locations. The Kiosks offer a subset of the full VPRT product suit. Staples chooses the prices and pays VPRT per order based on a wholesale agreement. Orders are routed through VPRT's facilities and shipped either to the store or directly to the customer.

They have a similar partnership with FedEx Office.

Overall, it's not a material contributor to revenues. I was intrigued because the partnership was disclosed in a short bullet point in the 3Q earnings and sounded promising.[/size]

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