The 400% Man!

May 16, 2014

Greenberg at Brave Warrior also has a decent stake in VPRT.

APG12 · May 16, 2014

To understand VPRT's valuation you really have to ask how much of the marketing spend should be classified as growth investment (ie. what are the real owner earnings). And what return is the company getting from this investment? If the company had spent the money on acquisitions instead of higher marketing expenses the EV/EBITDA ratio would be a lot lower so it's deceptive in this respect.

If the company has a moat, it's in their ability to be a low cost producer. At one point they were the low cost producer for business cards and other low quantity print jobs but a quick search for business cards indicates there are many similarly priced alternatives now. The J curve idea is interesting, but if this is your thesis you better have a good idea of where the company is getting the data that justifies this strategy. And also how reliable is this data? And what are the other implications for VPRTs customer base as you implement this strategy?

One final observation: the greatest low cost producers (Borsheims, Nebraska Furniture Mart, Wal-Mart, GEICO, etc) had one strategy- provide the lowest possible price to customers. Imagine Sam Walton hiring a firm to analyze his customers, looking at the data, and concluding that what he should really do is shift his primary focus away from price in order to attract a specific subset of customers that the data says will be likely to spend more money in his stores. Walton would have tossed out any such strategy immediately. Is this strategy really one that makes sense for VPRT?

May 16, 2014

To understand VPRT's valuation you really have to ask how much of the marketing spend should be classified as growth investment ................one final observation: the greatest low cost producers (Borsheims, Nebraska Furniture Mart, Wal-Mart, GEICO, etc) had one strategy- provide the lowest possible price to customers. Imagine Sam Walton hiring a firm to analyze his customers, looking at the data, and concluding that what he should really do is shift his primary focus away from price in order to attract a specific subset of customers that the data says will be likely to spend more money in his stores. Walton would have tossed out any such strategy immediately. Is this strategy really one that makes sense for VPRT?

+1+100+1000!

Keeping cost low, established over the long term by cost avoidance and the ability to take out cost continuously is a winning strategy. I would add the following well known names to your low cost leader list: Costco, Dell, Toyota, Vanguard Funds, Southwest Airlines etc. It appears that 3G capital follows this philosophy as we are watching the Heinz restructuring under way. I welcome readers to add to this list as this is my primary fishing pond for value investment ideas. Enduring low cost basis is a huge lever unlike anything else to be successful in whatever market you serve. Like you are pointing out the Sam Waltons of the world don't mess around trying to find creative ways to pull more money out of customers' pockets (than what competitors are doing). Of all things Business schools teach wrong about the real world, this is a big one. There are so many pretenders out there, schooled in Business Schools, who are busy trying to "get price". This activity causes so much frictional cost within businesses that they have not a chance when they go up against the street smarts like Walton or Bogle. I have been a student/fan of the Toyota Production System for a while now and that system is built on the central premise "Market determines price, we have to keep cost low"

KCLarkin · May 16, 2014

The issue here is these guys are not exceptional printers. I'll address the major points to why you think it is good investment:

All printers have high ROE look at RR Donnelly and the other printers. Why is this the case? From what I see the technology becomes obsolete and there a huge amounts of overcapacity in the industry. This overcapacity leads to price competition (just look at Vistaprint's margins going from 25% to 11% - more in line with the industry average). The only way Vistaprint was able to grow was to accept lower margin jobs. Why do think these jobs will all of sudden become higher margin jobs? The printing business does not have many long term contracts so you are competing job to job. They say reduced margins say it is due to temporary higher costs (I think this is bogus because I see the increased costs as a cost of doing more business. If you stop spending then business will go elsewhere where others are will to spend.)

The moat you mention has no profitability associated with it. The reason Vistaprint can make a profit is you can't change anything as a customer for your job or you get charged to print it again. This is a terrible way to build customer loyalty. The customers are so small with no lock-in, I doubt they make much money on them. If you look at the turnover stats, the retention is terrible, there repeat customer count is only 42%. The incremental revenue they have acquired since 2009 has resulted in negative OCF growth so I am not sure low cost matters if you are incrementally losing free cash flow.

VPRT sells at a premium multiple to other mainline printers like RR Donnelly (6x EBITDA) when they are smaller and less profitable. I just think the price includes a rosy outlook (11x EBITDA is not a bargain price to me) and if the only way you get to a lower multiple is to assume some costs away (which I questions they can remove and keep the same level of revenues) then that adds additional risk. I could never figure out why some value guys liked this company. BTW my dad owns a short run digital printing company so he is very familiar with the printing business so we have some insight some outside the industry may not.

Packer

Looking at Ycharts, RRD has had ROE pretty close to zero over the last five years. RRD also has a lot of debt, which would also artificially inflate ROE. RRD is facing major headwinds. A big portion of their revenue is for catalogs, etc. I used to run a digital catalog business and I can tell you the big catalogs (Crate and Barrel, Restoration Hardware,etc) are cutting back on their mailings.

RRD has 21% gross profit margin versus 65% for VPRT. VPRT is forecasted to grow EPS at 20%. I think it is pretty obvious that VPRT deserves a significant valuation premium to RRD.

But for a value guy, the bet is that current earnings aren't normal and that they will revert to historical trend. I am very comfortable with this bet and I like the widespread scepticism. If I am wrong, I won't lose much.

As a long-term investor, I am very concerned about the capital intensity of the business though.

KCLarkin · May 16, 2014

At one point they were the low cost producer for business cards and other low quantity print jobs but a quick search for business cards indicates there are many similarly priced alternatives now.

Don't confuse cost with price. They are still the low cost producer IMO. Because of their margins and scale, they can outspend their competitors on marketing and service.

One final observation: the greatest low cost producers (Borsheims, Nebraska Furniture Mart, Wal-Mart, GEICO, etc) had one strategy- provide the lowest possible price to customers. Imagine Sam Walton hiring a firm to analyze his customers, looking at the data, and concluding that what he should really do is shift his primary focus away from price in order to attract a specific subset of customers that the data says will be likely to spend more money in his stores. Walton would have tossed out any such strategy immediately. Is this strategy really one that makes sense for VPRT?

I think GEICO is probably a better comparable than WMT. GEICO uses some of its cost advantage on advertising their lovable Gecko. GEICO got into real trouble when it shifted it's focus from it's highly profitable target niche of safe drivers and started underpricing insurance for all comers. Buffett had to bail them out...

Packer16 · May 16, 2014

The issue here is these guys are not exceptional printers. I'll address the major points to why you think it is good investment:

All printers have high ROE look at RR Donnelly and the other printers. Why is this the case? From what I see the technology becomes obsolete and there a huge amounts of overcapacity in the industry. This overcapacity leads to price competition (just look at Vistaprint's margins going from 25% to 11% - more in line with the industry average). The only way Vistaprint was able to grow was to accept lower margin jobs. Why do think these jobs will all of sudden become higher margin jobs? The printing business does not have many long term contracts so you are competing job to job. They say reduced margins say it is due to temporary higher costs (I think this is bogus because I see the increased costs as a cost of doing more business. If you stop spending then business will go elsewhere where others are will to spend.)

The moat you mention has no profitability associated with it. The reason Vistaprint can make a profit is you can't change anything as a customer for your job or you get charged to print it again. This is a terrible way to build customer loyalty. The customers are so small with no lock-in, I doubt they make much money on them. If you look at the turnover stats, the retention is terrible, there repeat customer count is only 42%. The incremental revenue they have acquired since 2009 has resulted in negative OCF growth so I am not sure low cost matters if you are incrementally losing free cash flow.

VPRT sells at a premium multiple to other mainline printers like RR Donnelly (6x EBITDA) when they are smaller and less profitable. I just think the price includes a rosy outlook (11x EBITDA is not a bargain price to me) and if the only way you get to a lower multiple is to assume some costs away (which I questions they can remove and keep the same level of revenues) then that adds additional risk. I could never figure out why some value guys liked this company. BTW my dad owns a short run digital printing company so he is very familiar with the printing business so we have some insight some outside the industry may not.

Packer

Looking at Ycharts, RRD has had ROE pretty close to zero over the last five years. RRD also has a lot of debt, which would also artificially inflate ROE. RRD is facing major headwinds. A big portion of their revenue is for catalogs, etc. I used to run a digital catalog business and I can tell you the big catalogs (Crate and Barrel, Restoration Hardware,etc) are cutting back on their mailings.

RRD has 21% gross profit margin versus 65% for VPRT. VPRT is forecasted to grow EPS at 20%. I think it is pretty obvious that VPRT deserves a significant valuation premium to RRD.

But for a value guy, the bet is that current earnings aren't normal and that they will revert to historical trend. I am very comfortable with this bet and I like the widespread scepticism. If I am wrong, I won't lose much.

As a long-term investor, I am very concerned about the capital intensity of the business though.

Accounting RoE can be very misleading in a business with a lot of acquisitions and intangibles on the books. I like to look at FCF/(WC + FA) as my RoE equivalent. If you look at this metric you will see VPRT is not all that different than RRD. VPRT has had growth but that had actually got them little to nothing in terms of FCF. If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix.

Packer

KCLarkin · May 16, 2014

If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix.

This assumes that price is the key competitive dimension. I would argue that for many customers who are spending $100/year on printing, pricing is mostly irrelevant. They will go with the company they have heard of. Vistaprint's scale let's them outspend their competitors on advertising and marketing.

I suspect that this realization is what caused VPRT to shift their strategy. Shipping out crappy, free business cards gets you scale but doesn't build your brand. The key metric I'm watching is Net Promoter Score. Customer satisfaction is going up, which should be a leading indicator.

KCLarkin · May 16, 2014

Does anyone have any insight into why he is buying Alleghany now? He must be seeing some hidden value that I can't see.

Hielko · May 16, 2014

I think he often buys companies that are simply very solid, conservative and reasonable priced. I doubt that he expects that it is going to have a ton of upside, but it probably should do well/reasonable in most scenario's

JAllen · May 16, 2014

Perhaps it's time for a separate VPRT thread so this one can become un-hijacked for those that only want to be notified and read about Allan Mecham?

PatientCheetah · May 16, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Packer16 · May 16, 2014

If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix.

This assumes that price is the key competitive dimension. I would argue that for many customers who are spending $100/year on printing, pricing is mostly irrelevant. They will go with the company they have heard of. Vistaprint's scale let's them outspend their competitors on advertising and marketing.

I suspect that this realization is what caused VPRT to shift their strategy. Shipping out crappy, free business cards gets you scale but doesn't build your brand. The key metric I'm watching is Net Promoter Score. Customer satisfaction is going up, which should be a leading indicator.

I think to the small business guy price is important and even more so if switching costs are low (which they are). The printing customer who has money to spend is already being serviced by one of the big printers and is sub-contracting out the work his company does not do. I don't think advertising makes that much a difference as price and relationship to the larger business folks VPRT is targeting. So for them to be successful they will need to steal customers away. I think the 42% annual repeat customer rate tells the story of how loyal the VPRT customers are and how much repeat revenue they can get for their S&M spend (not very much).

Packer

KCLarkin · May 16, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.

WEB and tepper have too much money.

I like small, concentrated, quality-focussed portfolios.

learner · May 16, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.

WEB and tepper have too much money.

I like small, concentrated, quality-focussed portfolios.

KCLarkin- which other investors do you follow that fit your criteria? I follow Pabrai and Ted Weschler at Berk.

oddballstocks · May 16, 2014

If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix.

This assumes that price is the key competitive dimension. I would argue that for many customers who are spending $100/year on printing, pricing is mostly irrelevant. They will go with the company they have heard of. Vistaprint's scale let's them outspend their competitors on advertising and marketing.

I suspect that this realization is what caused VPRT to shift their strategy. Shipping out crappy, free business cards gets you scale but doesn't build your brand. The key metric I'm watching is Net Promoter Score. Customer satisfaction is going up, which should be a leading indicator.

I have a small business and spend >$100/year on printing. The best quality at lowest cost is my objective. I've used Vistaprint, they were ok. I've used other printers as well. If someone is offering a deal I will always take it, there is a lot of competition in this arena.

There's no lock in. None of the sites I've used let me save designs or upload a portfolio. I have to start from scratch each time. Since that's the case why wouldn't I shop on price?

ukvalueinvestment · May 16, 2014

You might want to try Children's Investment Fund. They invest in a lot of "quality". eg currently Moody's. I think they leverage it sometimes, as Arlington appears to.

KCLarkin · May 16, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.

WEB and tepper have too much money.

I like small, concentrated, quality-focussed portfolios.

KCLarkin- which other investors do you follow that fit your criteria? I follow Pabrai and Ted Weschler at Berk.

Unfortunately, not many fit the size criteria. I like Ted and Todd but they are hard to follow due to the commingled portfolio. I like Eric Khrom but I don't think he is big enough to file a 13F and doesn't seem to disclose positions in his letter anymore.

In Canada, I follow Jason Donville and Mawer New Canada.

I am in awe of Munger's 13F. Pabrai would be higher on my list if he hadn't experimented with diversification after the crash but I should probably take him out of the penalty box. His 13F is a thing of beauty too.

karthikpm · May 17, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Their 5 year return is 39% CAGR.. Granted it is a very short time to judge someone a super-investor but his process is also very sound. I suspect he will outperform the broad indices over time.

learner · May 20, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.

WEB and tepper have too much money.

I like small, concentrated, quality-focussed portfolios.

KCLarkin- which other investors do you follow that fit your criteria? I follow Pabrai and Ted Weschler at Berk.

Unfortunately, not many fit the size criteria. I like Ted and Todd but they are hard to follow due to the commingled portfolio. I like Eric Khrom but I don't think he is big enough to file a 13F and doesn't seem to disclose positions in his letter anymore.

In Canada, I follow Jason Donville and Mawer New Canada.

I am in awe of Munger's 13F. Pabrai would be higher on my list if he hadn't experimented with diversification after the crash but I should probably take him out of the penalty box. His 13F is a thing of beauty too.

Thanks for the pointers KCLarkin and ukvalueinvestment.

mhdousa · May 20, 2014

why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records

He's probably done >25%/year for the past 13 years. I'm curious who are the "lot people on this board" who have done better. I'm sure a few have, but a lot?

And your signature is not the definition of insanity.

ZenaidaMacroura · May 20, 2014

Perhaps it's time for a separate VPRT thread so this one can become un-hijacked for those that only want to be notified and read about Allan Mecham?

one step ahead of ya!

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/vprt-vistaprint/msg169541/#msg169541

KCLarkin · May 29, 2014

Anyone have the full 2013 letter? Some excerpts are here:

http://www.beyondproxy.com/author/allan-mecham/

karthikpm · May 30, 2014

Here is the 2013 letter.

Cheers

2013_Annual_Letter.pdf

jhcap · June 23, 2014

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