4imprint (FOUR) £50.80

Market cap: £1.43 billion

We think the sell-off in shares of 4imprint (FOUR) since the direct marketer of promotional products released its first-half trading update in August presents a good opportunity to buy into a high-growth, cash-generative business at an attractive price.

The firm is one of the leading players in the $25 billion-a-year North American promotional market, which is highly fragmented and ripe for consolidation.

Its ability to deliver was evident in the first half, when the firm increased its revenue by 5% against tough comps (it posted 23% growth in the prior-year period) and a challenging market and increased its market share to 6.3% from 5% at the end of 2023.

With US corporate earnings booming and confidence improving as rate cuts feed through into the economy, we believe the opportunities for 4Imprint to grow its business and its earnings over the next few years are there for the taking (analysts at Panmure Liberum see potential for the firm’s market share to reach 10%).

Outside North America, the firm does a small amount of selling in the UK and Ireland (less than 2% of group revenue) although with a total addressable market of $1 billion per year there is plenty of upside should the opportunity arise.

FIRST-HALF PROGRESS

For the six months to June, the company managed to increase customer numbers, increase order volumes and increase its average order value, which was no mean feat.

As chairman Paul Moody admitted, revenue growth was harder to achieve than in previous years but the firm continued to outperform the rest of the industry and by doing so gained market share.

It also managed to increase its operating margin by 50 basis points or 0.5% to 10.5% thanks to carefully-targeted price rises, management of supplier cost rises and a more flexible marketing mix, so earnings per share increased by 11% and the dividend was hiked by 23% as a reward for shareholders.

Moody forecast a similar level of sales growth for the second half, but said once the firm has managed its way through the current market conditions there were ‘attractive prospects for significant further organic growth over the medium term’.

STRONG CASH GENERATION 

One of the big attractions of 4imprint’s business as an investor is it is highly cash-generative, with consistent negative working capital requirements.

The firm sells a wide range of promotional products like branded bags, pens and stationery to companies in North America, but rather than manufacturing the goods it sells, it outsources the work to third parties which means it has limited capital needs.

As well as stationery, the company has branched out with outdoor brand ‘Crossland’ which produces fleece jackets, beanie hats, vacuum mugs, backpacks and coolers, and its ‘Refresh’ line focuses on affordable water bottles, tumblers and travel mugs.

Where the firm spends money is on marketing, including advertising on tv, and it maintained that spend in the first half with the result that revenue per marketing dollar slipped to $7.64 from $8.22 in 2023, but we consider this an investment in the brand.

At the end of June, the company had net cash and short-term deposits of $121.5 million, up from $104.5 million at end of 2023.

With limited investment needs, the firm raised the interim dividend, and given its exceptionally-strong balance sheet we would not be surprised if at some point there could be additional returns to shareholders, either in the form of a special dividend or a buyback.

WHY INVEST NOW?

The sell-off in the shares since the first-half results means they are up around 12% year-to-date, significantly less than the S&P 500 index which is up 23% and has just registered its 46th new high of 2024.

We conservatively estimate 4imprint has grown its earnings at around a 17% compound annual rate from the start of the 2000s up to 2020, and despite an obvious drop-off due to the pandemic and a pause in promotional activity, earnings have bounced back with a vengeance to sit considerably above their previous trend.

Consensus forecasts for this year and next year suggest that far from reverting to their old trend, earnings are on a new, higher plane, which means the shares look cheaper than they have done in a long while.

Add in the fact the firm is almost completely exposed to the US market - where public valuations are much higher than they are in the UK - and is highly cash-generative with a rock-solid balance sheet offering the potential for enhanced shareholder returns, and the shares begin to look like something of a gift at the current price.

It’s also worth noting that with a market cap of less than £1.5 billion ($1.8 billion) and a free float of more than 98%, with no major controlling shareholder, the business has to be on the radar of private equity investors, who are currently sitting on record amounts of ‘dry powder’.

The obvious risk to the investment case is if one of the other major players, for example Amazon (AMZN:NASDAQ), decides to start a turf war, but we suspect they are much more likely to buy 4Imprint to build market share rather than cut their own margins for the same outcome.

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