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PNI Media

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Investment thesis on PNI Media (previously known as Photochannel) from BlueCut Capital below. I found it here on KaChing.

Aaron Edelheit of Sabre Value shared a similar thesis at Value Investing Congress in 2008.

Yes, it’s Canadian. And no, you’ve never heard of it.

PNI is a MicroCap, generating free cash flow via its scalable printing platform, that has the potential to significantly appreciate as it expands its: business lines, market share, and presence among investors.

What does PNI do? PNI operates a digital printing platform with many applications. Currently the primary application is for retail photo printing, which is where 80% of revenue comes from.

Here?s how it works. You go to CVS?s website, click Photo, and you are taken to a CVS-Photo branded site. Well, check out your address bar after you click (do it again). You are actually being redirected to PNI?s platform. Once you upload and select your pictures for printing, the order is routed thru PNI to a local CVS that you have selected. Retailers love it, as creates traffic. PNI makes about $.o3 per print. But it sounds like peanuts, right? Yep, lots of peanuts. Their other customers include: Costco US, Costco Canada, Sam?s Club US, King, Fred Meyer, Tesco, Hallmark, Marks & Spencer, FujiFilm, Kodak, etc. Get the picture? (sorry, that was bad.)

Check out Page 6 of their most recent corporate presentation.

http://bluecutmarkets.com/2009/0​9/27/pni-digital-media/

More recently PNI has developed applications for iPhones, Kiosks (big in Asia), and Facebook.

Thru these channels, PNI is hoping to expand high margin Photo Books , business printing, stationary, and personalized chotchkies.

Catalysts for PNI

1. Expanding business lines. In July, PNI announced that they were starting an online business printing platform.

2. Increased focus on Investor Relations

3. Recent iPhone App

4. Margin expansion. As installation costs contract, look for transactional revenue margins to approach 80%

5. Revenue Growth abroad. Outside the US, UK, & Canada there is almost no revenue being generated. China, Western Europe, & Australia are a focus.

6. Winning an RFP from a little company in Arkansas (starts with a W, ends with Mart).

Lets do the dirty; here are the valuation metrics we?re looking at:

Company vs. Shutterfly

Forward P/E: 5 vs. No Earnings

5 Year Compounded Annual Growth Rate : 70% vs 11%

EV/EBITDA: 4x’s vs. 6.5x’s

Tinker with the assumptions in a DFC model any way you want, these guys are growing like a weed. JP Morgan was shooting it?s mouth yesterday, calling for multiple expansion based on SFLY trading at a discount to its peer group average of 11.5x?s EV/EBITDA. While the guy who made that call did much better on his SAT?s than us, with a better platform, that produces higher margins, what about PNI? They trade at less than half that multiple. Why? No one cares about a company that does no banking business and has a market cap of $55m.

Forget about Shutterfly for a minute. Name a free cash flow positive company that has 60% market share, 20% EBITDA margins, NO net debt, has their bobber out for a monster fish, and trades at 5x?s forward earnings. We can?t find one. Not to mention a retail business that grew at 20% last year!

In addition, management is making a concerted effort to tell its story to the investment community. We like that they focused on growing the customer base and improving the technology in their infancy. Management indicated that they are willing to travel anywhere and everywhere to get new business or spread the word. The officers also have a lot of skin in the game, being public was not a liquidity plan, their personal net worth is directly correlated with the stock price. This is important because their on the same side of the table as their investors.

So what?s the draw back?

1. Liquidity. In order for an Institutional Investor to buy enough of this to matter, they have to take a huge stake in the company. Besides being a regulatory hassle, they can?t get out of the stock without crushing the price. Every mutual fund manager?s worst nightmare is having to explain why he?s down and can?t get out. This works out great for us, we don?t run a monster Fidelity fund.

2. Currency. A weak dollar hurts these Canadian boys. We?re not Macro traders, so we don?t know where the dollar is going, but we do have faith that the company will be able to hedge exposure once their size makes it economical to do so

3. Its in Canada, and its a “Penny Stock”. They need to get above $4 to trade on the NASDAQ. To get their they need institutions, but some institutions can’t own anything below $5. So hear we are in ‘no man’s land’. However, earnings tend to speak loudly.

In summary, PNI is a name that we are comfortable holding in our 20% opportunistic “bucket” within the portfolio. We are long, and don’t mean to be SO loud, but we love this name. We have a position in it, and will continue to do so for the foreseeable future. Based on a superior model and margins gravitating toward 80%, we apply a 10 multiple to EV/EDITDA, and look for the stock to trade to $4.

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Written by latticework01

January 5, 2010 at 5:34 pm

Posted in Uncategorized

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