I have been discussing Cimpress plc (NASDAQ:CMPR) in the past, and you can read my previous article published on January 11, 2024. In that piece, I how the company benefited from above-average growth in Europe, while North America witnessed slow growth. By Q3 2024, an improvement in the real estate market started to impact its BuildASign and Vista sales positively. In Q3, the adjusted EBITDA margin in most of its operating segments improved. The company also plans on managing its leverage ratio better in the future.

However, the décor end market was slow in 2024, adversely affecting its BuildASign business. The company's negative shareholders' equity will carry some risks, but the factor has been partially offset by improved cash flows. The stock is reasonably valued. With many factors pointing to a balanced outlook, I consider the stock a “hold” for the medium term.

Why Do I Keep My Call Unchanged?

In my previous article, published on January 11, I highlighted CPMR’s growth drivers. Its customer acquisition increased in Europe due to a focus on value-added products and expanding product breadth. Also, its input costs decreased while it adopted cost-reduction measures. However, its US outlook was uncertain. I wrote:

CMPR shifted its strategy from relying on promotional expenditures to concentrating on producing higher-value products. A better product mix and improved pricing led to higher average order value and higher demand for packaging, labels, and marketing materials. The company saw margin growth in Europe as energy costs decreased noticeably in that region.

At the start of Q4 2024, CMPR started benefiting from an improved end-market outlook and market expansion. Although volatility will remain in the US, I expect the company’s financials to improve, albeit at a moderate rate. The balance risks remain because of negative shareholders’ equity. But much improved cash flows will provide a cushion from near-term shocks. In my opinion, the stock remains on “hold.”

Key Growth Areas

The home décor market witnessed a surge in demand during the pandemic. Since then, it has been normalized at a lower level. There is also an indirect relationship between real estate as an end market and décor/canvas prints. The company estimates that real estate accounts for approximately 10% of BuildASign's revenue. The clients include national real estate franchises, which constitute its large enterprise accounts.

In North America, the signage category in BuildASign and Vista have performed strongly recently. BuildASign is an important production partner for Vista because of its low-cost structure for signs for large-format products. Although demand has been volatile, the management believes it can adapt and improve over time. I think the company’s growth can accelerate in the Vista segment.

Outlook Explained

In FY2025, CMPR’s management expects revenues to grow at least by “mid-single-digit” (at the organic constant currency). It also expects its adjusted EBITDA to outgrow revenue. It also expects adjusted EBITDA-to-free cash flow to be 40%-50%.

CMPR has set a new leverage policy that targets net leverage (debt-to-EBITDA) at ~2.5x or below by 2025. However, given the company’s aim to invest with sufficient returns, the ratio can rise above 3x intermittently. Also, given the share repurchase program, the leverage ratio can skid and settle at a higher rate (~2.75x) in 2025. It plans to maintain opex investments at roughly the current rate.

My Estimates

Over the past 12 quarters, its adjusted EBITDA increased by 21% on average. Over the next few quarters, I expect the EBITDA growth to decelerate due to a décor end market decline. However, its topline growth from real estate and a strong US PMI index can remain steady. Over the next four quarters, I expect its adjusted EBITDA to increase by 10% - 12%, at a conservative estimate.

Industry Factors

The ISM Services PMI increased to 53.8 in May 2024, compared to below 50 in April. Rapid new order growth, higher business activity, and slower supplier deliveries led to the rise. However, employment deteriorated in May. A PMI exceeding 50 can positively affect CMPR’s outlook. Still, difficulties in backfilling positions and controlling labor expenses can pose challenges to potential growth.

The number of new one-family home units for sale in the US increased by 7% year-to-date. In the past year, sales of such units increased by ~13%. New unit sales can be a rough proxy for real estate sales. An increasing number is a positive for CMPR.

The Q3 Result Analysis

Year-over-year, CMPR’s revenues increased by 5% in Q3 2024 (as released in its Q3 2024 earnings on May 1). The National Pen segment accounted for much of the growth (~10% up), followed by PrintBrothers (7.7% up) and Vista (5% up). Vista, which has the highest share in CMPR’s sales portfolio, continued with the uptrend witnessed over the past few quarters. It saw improvements in customer count and per-customer value. the value of the new customer acquisition also increased in Q3.

Similarly, the adjusted EBITDA margin in National Pen improved the most by turning positive in Q3 2024 over a year ago. The EBITDA margin in Print Group expanded by 480 basis points during this period. The VISTA segment also saw the margin expand in Q3.

The Growth Challenges

CMPR’s home décor end market has been slow in 2024. This affected its BuildASign business, which provides canvas-print wall décor, business signage, and other large-format printed products. Home décor accounts for nearly 50% of the BuildASign revenue. Canvas Prints is the largest product category in home décor, which the consumers use in the home or for gifts. The channel performance for BuildASign was under par in Q3 because the channels have not been efficient lately.

Cash Flows And Debt

In 9M 2024, CMPR's cash flow from operations increased remarkably, by 2.3x, compared to a year ago. This was primarily due to lower working capital requirements related to inventory reductions and timing impacts from favorable changes to accounts payable and accrued liabilities. Free cash flows (or FCF) also increased impressively in 9M 2024.

CMPR's shareholders’ equity remained negative due to treasury shares and accumulated other comprehensive losses. In April, it received $16.8 million in net proceeds from the sale of a building in Jamaica. Although its liquidity was $423 million as of March 31, total debt was too high ($1.42 billion in net debt) for comfort.

Relative Valuation And Target Price

CMPR's forward EV/EBITDA multiple versus the current EV/EBITDA is expected to contract more sharply than its peers. This usually results in a higher EV/EBITDA multiple for CMPR. Its EV/EBITDA multiple (11.3x) is higher than its peers' (EBF, BRC, and AMWD) average. So, the stock is reasonably valued compared to its peers.

CMPR’s average EV/EBITDA multiple for the past five years was 14.5x. If the trades at that multiple, the stock price can rise by 50% from the current level. If it trades at the peers’ average (8.2x), the stock price can decrease by 41%. Since my last publication in January, where I suggested a "Hold," the stock has increased by approximately 16%.

As I discussed earlier in the article, I expect 10%- 12% adjusted EBITDA growth in the next four quarters. Feeding these values into the EV calculation and applying the current sell-side EV/EBITDA multiple of 11.3x, I think the stock should trade between $107 and $110, implying a 21% upside.

Analyst Rating

Two Wall Street analysts rated CMPR a "buy" (including "Strong Buy"). None recommended a "hold" or a "sell." The consensus target price is $111.5, which indicates ~24% upside potential at the current price. I think, given the sales headwinds, Wall Street analysts are slightly overestimating the returns.

What’s The Take on CMPR?

CMPR currently focuses on product categories with higher growth potential or low-cost options. The signage category in BuildASign and Vista has performed strongly recently. The performance and economic condition of the US non-manufacturing companies and the US home units sold—two key economic and real estate indicators—have been strong in recent months. These translated into improved customer count, higher per-customer value, and margin expansion. As a result, the stock outperformed the SPDR S&P 500 ETF (SPY) in the past year.

In contrast, the home décor end market and channel performance for BuildASign have been slow. The company’s negative shareholders’ equity remains a concern. Improved cash flows, however, mitigate some concerns. CMPR plans to better manage its leverage (debt-to-EBITDA), but the share repurchase program can keep it elevated for now. Owing to these factors, I continue to rate it a “hold.”