At the Great Investors’ Best Ideas Symposium in Dallas on Oct. 18, Caroline Cooley, a partner at Crestline Investors Inc., revealed her current stock pick as Shutterfly (SFLY, Financial).
Cooley argues that Shutterfly, a popular Internet-based image publishing and printing service, is appealing because it has 60% of the market share and shows potential for strong growth.
Shutterfly was established in 1999 and is headquartered in Redwood City, California. The company enables users to create personalized photo gifts including scrapbooks, phone cases, wall art and home décor among other products. It also prints graduation and birth announcements and Christmas cards.
Cooley said the explosion in the popularity of photography mixed with the abilities of Shutterfly 3.0, which allows users to quickly and easily integrate images from various platforms and devices, and the company’s app will lead to further growth.
The company has a market cap of $1.5 billion with an enterprise value of $1.7 billion. It has a price-earnings (P/E) ratio of 95.4, a price-book (P/B) ratio of 2.9 and a price-sales (P/S) ratio of 1.4.
\
GuruFocus ranked the company’s financial strength 5 of 10. It has a Piotroski F-Score of 6, which indicates a stable financial condition. Its Altman Z-Score of 2.6 places it in the gray zone. The company’s cash-debt ratio of 0.4 and interest coverage of 1.33 are far below the industry medians of 0.8 and 30.8.
GuruFocus ranked Shutterfly’s profitability and growth 7 of 10. It has an operating margin of 2.7% and a net margin of 2.01%. Its return on equity (ROE) of 4.01% and return on assets (ROA) of 2.1% underperform 64% and 59% of other companies in the global personal services industry. Its return on capital (ROC) of 10.5% underperforms 65% of competitors.
Cooley expects the company to continue growing, citing the increase in both net revenues and free cash flow. In its full-year 2016 business overlook, Shutterfly projected net revenue to range from $1.13 billion to $1.16 billion, a year-over-year increase of 6.7% to 9.5%.
Similarly, free cash flow ranges from $130 million to $132.9 million. Cooley mentioned her firm believes the stock will reach $69 per share, creating a 50% upside, with downside protection.
The company does face some competition, however. Amazon (AMZN, Financial) recently started a photo-printing business as part of its Prime services. Snapfish, Hallmark and American Greetings are among its top competitors.
Cooley said she is not worried about competition from Amazon because Apple (AAPL, Financial) tried and failed to compete with a similar service. Cooley also said Shutterfly earns 10x that of its next largest competitor. With a line of quality products and its standing as the world’s largest four-color printer, Shutterfly has a clear competitive advantage.
Cooley also listed some catalysts that would help the stock. Shutterfly has a new president and CEO, Chris North, whose track record at Amazon UK proves he can help revenue growth continue to rise. Shutterfly also has potential partnerships lined up and has a good history of share repurchases.
PRIMECAP Management (Trades, Portfolio) is the company’s largest shareholder among the gurus with 16.2% of outstanding shares, which is 0.3% of their total assets managed. Mario Cibelli (Trades, Portfolio), Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also hold positions in Shutterfly.
The DCF Calculator gives the stock a fair value of $4.92; it was trading at $43.38 on Wednesday.
Disclosure: I do not own stock in any companies mentioned in the article.
Start a free 7-day trial of Premium Membership to GuruFocus.
