4imprint (LON: FOUR) has had a nice bounce following interim results last week but the shares haven’t really gone anywhere for the best part of a year. This represents something of a de-rating and suggests this quality growth stock might offer good value at current levels.
4imprint is a US-based company which designs and supplies promotional products for businesses. This is a fragmented market which means 4imprint has plenty of room to expand from its current 3 per cent market share. The company succeeds by really focusing hard on its marketing and customer relationship management.
Organic sales growth in the first half of the year was 11 per cent, which was well ahead of the low single digit growth in the overall market. However this does represent a slowdown from the high-teens rates in achieved in the past, which might explain an element of that derating. Also as a US company 4imprint reports in dollars, which gave sterling-based investors a boost last year, but is proving a bit of a drag at the moment. On a positive note the company says it has re-phased its planned catalogue marketing activities towards the second half; which puts in place ‘a firm foundation… for further organic revenue growth’.
As well as its long-run growth prospects as a relatively small player in a big market, 4imprint has very attractive financial characteristics. It enjoys a high return on capital, converts profits to cash and generates free cash flow. Until recently some of these returns had been diverted to deal with legacy pension issues, but this seems to have been resolved. The company is paying in $3 million a year over the next five and a half years with the intention of eliminating the deficit over this period. With this problem under control, we should see an increased dividend payout in future. Net cash improved to $33 million at June, up from the $22 million in the December balance sheet.
This is a well run business which has the virtue of simplicity. It has many customers, a lot of repeat business, and minimal threat from technological change. The model is not to chase margin, but to keep prices competitive and continually reinvest in marketing programmes which drive the top line. A prospective p/e of 18.5 and current year yield of 2.6 per cent look attractive given the quality and growth prospects.