Top picks 2013: Shutterfly
This online photo company could be the picture of profits in the year ahead.
Online photo printing website operator Shutterfly (SFLY) is our top aggressive pick for 2013.
The company's biggest advantage over competitors is that it has invested in its business and is the only major online photo company that prints in-house, which gives it a significant margin advantage over competitors that outsource their printing needs.
Meanwhile, more volume for its subsidiary Tiny Prints, which was acquired in April 2011, should shift in-house this holiday season compared to last year when only about a third of volumes were printed in-house. This should lead to some nice margin expansion, which currently is not in the company's guidance.
Promotional activity in the online photo space remains heightened, but appears to have moderated compared to last year.
We also continue to think that rival Snapfish's tactics make little sense long term for the struggling Hewlett-Packard (HPQ), and that eventually the company will sell the non-core asset at some point in the future.
Meanwhile, American Greetings (AM) shutting down its free photo-storage site Webshots and replacing it with a subscription one has likely alienated a lot of customers.
Outside of this, we think Shutterfly has the best offerings in the fast-growing online photo space, and that the company should continue to benefit from increased scale, possible international expansion, lower manufacturing costs, and new higher-margin products, like iPhone cases.
We also like some of its recent technology-based acquisitions, and think mobile represents a solid opportunity for the firm.
Shutterfly currently trades at about 12 times the 2014 consensus for free cash flow per share of $2.45, or 11 times excluding its net cash of $2.49. That's inexpensive for a fast-growing company that is riding a solid secular trend.
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