4/17/2017

Cash Rich, Market Ignored Restructuring Opportunity, CafePress (PRSS)

Profile:

CafePress (PRSS) sells customized t-shirts/clothing, bags, drinkware, stationary, cases, home accessories, hobby, and related items. http://www.cafepress.com/. Competition exists in this fragmented industry. More direct competitors are privately held Zazzle (http://bit.ly/1xefWC7) , Society6 (https://society6.com/) , and online Australian retailer Redbubble (http://rdbl.co/1duw5VC). 


Curious about the business of CafePress? Watch this interesting video.

CafePress (PRSS) is an illiquid tiny company and may NOT be suitable for many investors. Further, operations are still a work in progress. However, its 2.5 year turnaround plan became obvious during FY 2016. Particularly, Q4 2016 the business stabilized generating free cash flow. But, the market continues to ignore tangible turn around wins . Although, it has not gone unnoticed by guru micro cap value investor Lloyd Miller. He recently added to his 18% stake on 04/13/17 along with his heavy insider buying during 2016.In addition, the company's 2 founders and now CEO and CMO recognized improvements by adding to their existing large inside ownership throughout 2016.


August 2014, co-founder and former CEO Fred Durham returned as the CEO along with Maheesh (co-founder and prior executive) as Chief Marketing Officer. Durham promised transparency throughout the turnaround process. This included an assurance to reduce expenses with a laser focus on a quick as possible increase in shareholder value. With significant skin in the game, Durham and Maheesh are two of the biggest shareholders and have a strong incentive to align with investors. They now own 15% and 12% respectively.

Part one of the 3-part turnaround plan requires the heaviest lifting before maximizing 2 and 3. Part one is business stabilization.  This means doing more with less. Eliminate unnecessary complexity that has over time diluted and then destroyed the company’s value. The prior CEO’s drive for growth is the most troubling ingredient that destroyed the stock price. The business focus became diluted and the customer experience suffered. Over time, they discovered managing a large group of brands had become counterproductive. So, a goal set to streamline operation, enhance the balance sheet, and unlock value by selling the non-core assets. The long-term growth strategy is the more efficient and profitable realization of a higher portion of repeatable sales.

These are some of the TANGIBLE RESULTS ACHIEVED OVER THEIR RECENT TENURE (2.50 YEARS) TO STABILIZE AND IMPROVE THE BUSINESS.  
Closed the experimental Louisville Kentucky retail store; sold their stationery business (InvitationBox.com); Arts and Groups properties sold for $40 million in cash.

An important valuation comment is the 2015 Art and Group sale (http://on.mktw.net/2oEFf0t). It represent 20% of total CafePress revenue sold during 2015. The most encouraging fact of the sale is it sold for an EV/Sales of around 1.50 versus the PRSS current EV/Sales of .05. I calculated the Arts and Group valuation based on the final 40M cash sale stated by management and financial data in the press release http://on.mktw.net/2oEFf0t 
"The Art business represented approximately 20 percent of CafePress’s total revenues in 2014." PRSS total sales for 2014 was 132.10M hence 20% of sales = 26.42M for the Art Group. Management stated the sale settled for ~40M in cash. So the EV/Sales valuation for the Art group was 40M/26.42M = 1.51 EV/Sales valuation or near this figure. Again the current market value for PRSS EV/Sales is .05 versus Art's sale valuation of ~1.51


The above mentioned asset sales are a key for stabilizing and moving the business forward. 

Furthermore, a reduced number of production facilities enables engineers to focus on CafePress, improve quality and efficiency. Fewer websites means developers can focus on enhancing the customer experience and conversion on CafePress. Fewer marketing systems concentrates the focus on improving marketing efficiency and customer transactions. 

An external consulting firm was used to do an extensive audit of margins, customer satisfaction, site conversion and volume. The discovered results now guide improvements in efficiency, merchandising, pricing and customer experience. Additionally, a review of over 600 products by starting at the bottom 10%, in terms of sales, margin and quality were removed and discontinued on their site.

After the above mentioned asset divestiture, engineering efforts can focus on improving mobile and social technology. The company is constantly looking to leverage technology progress that can cut friction and conversion. These technology improvement efforts will improve the customers experience. Overall, meaningful opportunities exist to drive an improved CafePress as their mobile channel matures and gains scale.

Lets continue reviewing the turnaround plan.  Durham commented an improved customer experience is an important personal area of focus. He promised to drive the team on consumer side quality and encourage a world class customer experience. Customer service now reports directly to Durham.





The tables below show Quarterly and Annual financial results. This underscores CafePress' deep asset value discount to its current market price, coupled with a stabilizing and improving 2016 financial results.











































 





Only Insider Buying no Selling from 2015 to 04/13/2014






















04/13/17 Valuation:  Market Cap = 48.10M, Enterprise Value = 4.66M, P/B = 1.08, EV/Sales = .05, YOY qtrly revenue growth = 6.06%, Total Cash = 43.79M, Cash per share = 2.63, 52 Week High = $3.82, 52 Week Low = $2.78, Share Outstanding = 16.64M, Float = 7.94M, % held by insiders = 46.33%, % held by institutions = 22.10%






Opportunities

Deep discount to its historical and relative valuation. To repeat the above comment, Arts and Groups properties sold during February 2015 had an EV/Sales valuation sale price ~ = 1.50. This compares favorably to PRSS current EV/Sale value of .05

It’s too cheap to ignore. A 04/13/17 closing price of $2.85 and  an enterprise value per share =.33 versus cash per share = 2.62, no debt, TTM gross profit per share = 2.51 and net cash per share = 1.52.

Large federal and state operating loss carry forwards available to reduce future taxable income. 25.2 million of Federal and $19.0 million for the State.

The original founders came back to turn the company around with skin in the game.Their combined ownership is over 25% TSO. They continued insider buying since their 2014 rearrival.

Successful small cap activist Lloyd Miller can’t get enough shares , 18% of TSO with additional buys reported on 04/13/17.

Major turnaround activities completed. FY 2016 shows tangible signs of improvements. "Year-over-year revenue growth improved each quarter from negative 23% in Q1 to positive 7.5% in Q4". Positive CFFO during FY 2016 Quarters 3 and 4. Positive FCF in quarter 4 2016. 


Mean reverting price attributes with 52 week market price change of -23%, -64% drop in the enterprise value from the 2014 value of 15.37M to 04/13/17 value of 5.54M.

Aggressive share buyback program, year end 2013 17.17M shares outstanding versus the MRQ reduced balance of 16.66M

Three new industry proven board members. Ken McBride is the CEO of Stamps.com. "He played a crucial role in the company's turnaround and has since lead it through steady improvements to impressive success." Nick Swinmurn, the founder of Zappos, is "a pioneer in consumer e-commerce and brings valuable consumer centric experience and creativity to the company".  Tony Allen is the CFO of Sypris Solutions and brings extensive financial experience and expertise to our Board.

Acquisition target, going private transaction or special cash dividend based with the 2.62 per share in cash. Activist Lloyd has a history of forcing special dividends. These are all high probabilistic events ignored by the market.
 
Risk
Lacks a strong moat.

Illiquid nano cap deters institutional ownership and lacks strong Wall Street coverage.

Closely held with 46% held by insiders.

May be unable to generate sustainable consistent profits and could be adversely impacted by competition.


Long: PRSS

4/09/2017

Good Company for a Cheap Price, DHI Group (DHX)


This post began by searching for stocks hitting their 52 week low. The DHI Group DHX reached its 52 low on Monday 04/03/17. At $3.90 it offered investors value. Then, the stock (DHX) moved up over the next few days as I prepared this post. DHX closed Friday (04/07/17) at $4.50.

The DHI Group (DHX) is a micro-cap with historical and impressive, consistent high FCF margins that the market forgot. Revenue growth challenges from a difficult specialized job market and increased competition (mostly perceived) chased away the original shareholder base of magic formula growth investors. This overlooked investment has an asset light business model that consistently generates the staffing industry's highest FCF yields. Also,coupled with its aggressive, opportunistic share buybacks, debt reduction and activist interest the stock offers longer term value investors a tempting opportunity.

Profile:
DHI Group (DHX) offers employment related professional connections through several specialized job recruitment websites. Additionally, their software services access, search and analyze their proprietary resume databases. These targeted professionals work within technology, financial services, energy, healthcare and the hospitality industries. Above all, the goal is to allow professionals and organizations to access proprietary data to compete for employment connections. Employers and recruiters use their websites and services to find the most qualified professionals within their skilled occupations. Individual professionals use their websites and services to find the best jobs, industry news, detailed salary information, and expand networking opportunities.

Their online recruitment packages target the difficult to fill employment categories experiencing a scarcity of skilled professionals relative to market demand. These online marketplaces are where employers and recruiters find employees. Professionals use the services to find job postings, news, career development and recruiting services. It's DHI Group (DHX) of recognized web sites, quality and size of its database of industry candidates that creates a competitive advantage. Last, DHI (DHX) has been in the recruiting and career development business for over 26 years.

Based on FASB accounting rules DHI has three reportable segments; Tech and Clearance (Dice, Dice Europe and ClearanceJobs); Global Industry Group (eFinancialCareers, Rigzone, Hcareers and BioSpace); Healthcare (Health eCareers). The remaining other services and activities individually are less than 10% of consolidated revenues, operating income or total assets.

Most of the revenues come from employers and recruiters who pay a monthly or longer-term contractual agreements for recruitment packages. These packages offer a combination of website job postings and access to their database of resumes on Dice, Rigzone, eFinancialCareers, ClearanceJobs, Health eCareers, BioSpace and Hcareers

This post will not be an operational deep dive. Or an analysis of the recruitment industry.Instead I will use DHI’s historical and competitors’ financial results for my investment case to justify its deep relative and historical valuation discount.

Current Valuation per Yahoo Finance as of  04/07/17:
 Market Cap= 272.67M, Enterprise Value =  272.67M, EV/EBITDA = 5.79, 52 week change = -45.30%,YOY revenue change -15.60%, Gross Profit Per Share = 3.92, Price Per Share on 04/07/17 =$4.50

Noteworthy comments on the below historical valuation table.
A consistent high FCF margin, current gross profit per share near its current market price.

An aggressive share count and long term debt reduction compares favorably to a mean reverting attribute , an unjustified enterprise value drop of 44% from 2013.

Historical low valuation for EV/GP at 1.36 versus the average of 2.42 over 2013 to 2016. EV/Revenue also at historical low valuation.






































DHI Group Versus 15 Staffing Industry Peers

Price Performance: Annualized 3-year stock return is -14.78% versus the +2.13% for the comparable 15 staffing peers, YTD% stock return is negative -29.60% versus industry average of positive +2.78%.

The Enterprise value dropped -44.89% from 2013 versus the industry's positive +19.55% over the same 3-year period.

DHI Group's FCF and Gross margins trounce its industry peers. TTM GM% is +85.85% versus industry +36.61%, FCF margins for the TTM is 14.19% versus the industry TTM average of 3.17%, 3 year (2013 to MRQ) average FCF margins is 16.68% versus the 3-year industry average of 4.16%.

Vigorous capital structure improvements with reduction in shares outstanding and debt from 2013 to the MRQ. Long Term Debt per share for 2013 to the MRQ reduced by 16.67% versus the industry increasing long term debt by 46.22%. Over the same 3-year period 2013 to MRQ shares outstanding reduced by 7.74% versus the industry .79%. See below supporting table

Industry Analysis


































Risk:

LinkedIn's increased entry into the recruitment market is an industry concern. This along with other competitors will impact pricing and growth.

A recession or weak economic growth.

An ill-conceived or poorly integrated acquisition pressured by the need for growth.

Subscriber decline will impact the brands value and pricing power.

Recent insider selling.

Opportunities:

An attractive absolute and relative valuation. Mean reverting candidate with a valuation gap and the industry's worst performing stock price. Valuation at 5 year low for P/B,P/S, and stock price returns.

A history of sound capital allocation with management correctly weighing the benefits of acquisitions, technology improvements, debt reduction or share buybacks.

In the fourth quarter of 2016, announced a decision to explore strategic alternatives. A financial advisor retained to aid its exploration of strategic alternatives.



Long: DHX