Cimpress Rides on Portfolio Restructuring, Risks Persist

On Jan 16, we updated a research report on business services provider, Cimpress N.V. CMPR.

With the use of proprietary web-based design software and advanced computer integrated printing facilities, Cimpress has a competitive advantage over traditional graphic design and printing methods. The company has shifted its value proposition away from deep discounts and free-offer direct marketing efforts to tap the large market opportunity beyond the traditional base of highly price-sensitive customers. At the same time, Cimpress is making steady progress with investments in new markets and its business strategy is focused on higher quality products and delivery, increased customer service and more transparent pricing to promote long-term customer relationships.

In addition, Cimpress has been acquiring firms with complementary product offerings and expects to ramp up its revenues with operating synergies through economies of scale and technological collaboration to serve customers across the globe. Cimpress has outperformed the industry in the last three months with an average return of 16.2% compared with a gain of 7.8% for the latter.

Cimpress’ business is scalable and its web presence and online tools for customer use are well established. While additional demand would result in various capital investments such as additional printing presses, these fixed costs would be spread over a wider revenue base. The company’s solid operational position is reflected in its history of strong fundamentals, which we expect to continue going forward.

Management has also decided to implement a radical change in the organizational structure by decentralizing operations to improve accountability for customer satisfaction and capital returns, simplify decision-making and improve the speed of execution. With operations in about 50 locations spanning 30 countries across six continents, decentralized decision making will enable the company to be nimble and entrepreneurial. The evolved corporate structure will likely lead to more accountability as the company expands into new geographical boundaries and markets to strengthen its position as a leading provider of mass customization business products.

However, headwinds in currency translation often add to its woes as Cimpress generates almost half of its revenues outside the United States. The strategic repositioning of the Cimpress brand further entails a huge risk. Presently, when the economy of Europe is highly unpredictable post the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. In addition, it is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

Despite enjoying a leading position in the industry, Cimpress faces significant competition from traditional graphic design and printing companies and other online suppliers. Moreover, increasingly advanced desktop publishing software and more capable desktop printers offer small businesses another cost-effective solution for their marketing needs. While these sources cannot meet the extent of Cimpress’ product offerings, they can handle day-to-day marketing needs of small business customers. This could harm top-line growth of the company.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the industry include MSC Industrial Direct Co., Inc. MSM, Ashtead Group plc ASHTY and Senior plc SNIRF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MSC Industrial Direct has a long-term earnings growth expectation of 11.5%. It has topped estimates twice in the trailing four quarters with an average positive earnings surprise of 2.6%.

Ashtead Group has a long-term earnings growth expectation of 15%. It has topped earnings estimates twice in the trailing four quarters with a positive surprise of 3%.

Senior plc has a long-term earnings growth expectation of 12.5%.

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