Here's Why You Must Hold on to Cimpress (CMPR) Stock Now

We issued an updated research report on Cimpress N.V. CMPR on Aug 16.

Netherlands-based Cimpress is an online provider of high-quality graphic design services, and customized printed products to small businesses and consumers. The stock, with approximately $4.3-billion market capitalization, currently carries a Zacks Rank #3 (Hold).

Let’s delve deeper and discuss the company’s potential growth drivers, and possible headwinds.

Factors Favoring Cimpress

Diversification a Boon: Cimpress operates through four reportable segments, including Vistaprint, Upload and Print, National Pen, and All Other Businesses. The diversified business structure has been beneficial for the company in the past and is anticipated to do so in the future. In fiscal 2018, weakness in the Upload and Print segment was more than offset by solid performance in other segments.

Furthermore, the company’s business operations in varies geographies — North America, Australia, Germany, Brazil, India, China and Brazil — helps in mitigating the risks arising from weakness in any single geography.

Inorganic Strategies: Another interesting aspect about Cimpress is its acquisitive nature. Over time, the company has solidified its product portfolio and leveraged business opportunities through the addition of assets. Here, the buyout of National Pen in fiscal 2017 (ended June 2017) is worth mentioning. This acquisition has been strengthening the company’s supply chain capabilities, especially for apparel, promotional products and gift offerings. Moreover, in July 2018, the company acquired 74% shares of VIDA Group Co.

Apart from this, the divestment of assets, over time, has helped in releasing funds — which can be utilized in a more resourceful manner. In fiscal 2018 (ended June 2018), the company has sold off its Albumprinter business.

Focused Investments: Cimpress has been investing funds, over time, for the improvement of its growth opportunities across various fields. It is actively involved in the development of its mass customization platform as well as strengthening its talent infrastructure in India. Also, the acquisition of capital equipment, raw materials and improvement of shipping services remain a priority for the company.

Factors Working Against Cimpress

Poor Share Price Performance and Valuation: In the past three months, Cimpress’ shares have yielded 1.1% return, underperforming 3% increase recorded by the industry it belongs to.

Moreover, on a P/E multiple (TTM basis), shares of the company currently appear overvalued compared with the industry. Its P/E multiple is at 166.3, higher than 29.5 recorded for the industry for the past three months. Also, the company’s earnings estimates for fiscal 2020 have seen downward revisions over the past month, pointing to unfavorable sentiment toward the stock.

These aspects somewhat make us cautious on the stock.

Weak Margins: Cimpress is currently struggling with the negative impacts of higher cost of revenues. Roughly 13.4% year-over-year increase in the cost of revenues in the fourth quarter of fiscal 2018 (ended Jun 30, 2018) more than offset the 11.9% increase in revenues. This led to 70 basis points (bps) fall in the gross margin the fiscal fourth quarter. Gross margin has also decreased roughly 80 bps in fiscal 2018.

Additionally, gross margin in the fourth quarter and fiscal 2018 were adversely impacted by Albumprinter divestment (this business was previously included in All Other segment). This divestiture might adversely impact the first quarter fiscal 2019 results as the year-ago comparable quarter includes two months of results from this divested business.

Weak Cash Position and Highly Leveraged Balance Sheet: A weak cash position can be concerning for Cimpress. In the last five fiscals (2014-2018), the company’s cash and cash equivalents went down 10.3% (CAGR). Notably, in the fourth quarter of fiscal 2018, the cash and cash equivalents decreased 11.4%, sequentially.

The company’s long-term debt has grown 12.3% (CAGR) in the last five fiscals. This includes the impact of $400-million fund raised through senior notes offering. Further increases in debt levels can increase the company’s financial obligations. In fiscal 2018, the company’s interest expenses increased by 20.6% year over year.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Altra Industrial Motion Corp. AIMC, Colfax Corporation CFX and DXP Enterprises, Inc. DXPE. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates on these three stocks improved for the current year and the next year. Earnings surprise for the last four quarters was a positive 4.01% for Altra Industrial, 7.9% for Colfax and 101.32% for DXP Enterprises.

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