Is Shutterfly a Hidden Gem?

With shares of Shutterfly (NASDAQ:SFLY) trading at around $40.40, is SFLY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Shutterfly isn’t on the radar of most investors. However, over 8 million shares were traded yesterday as the stock climbed 20.27 percent. This was due to an outstanding earnings report as well as strong guidance. Q4 EPS came in at $1.40 versus an average expectation of $1.01. Q4 revenue came in at $351.8 million versus an average expectation of $309.7 million. This was also a 33 percent increase year-over-year. Most importantly, this was mostly organic growth. Shutterfly has been expanding its customer base by using marketing and mobile tools. A ship-to-shore partnership with Costco Wholesale Corporation (NASDAQ:COST) should also assist growth.

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FY2012 EPS came in at $0.61 compared to $0.40 last year. FY2012 revenue was $640.6 million, which was a 35 percent increase over last year. In 2012, transacting customers increased 31 percent to 7.1 million. Orders increased 29 percent to 16.3 million.

It should also be noted that corporate sales are growing fast. Corporate sales climbed 7 percent to $8.3 million. This is a small segment of the business, but it’s likely to become much larger, which has the potential to help EPS growth in the future. Current corporate customers include UnitedHealth Group Incorporated (NYSE:UNH), AT&T (NYSE:T), and Dell Inc. (NASDAQ:DELL).

As far as guidance is concerned, FY2013 EPS is expected to come in between $0.39 and $0.42 on revenue between $739 million and $746 million. Wall Street had been expecting EPS of $0.46 on revenue of $707.8 million.

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Shutterfly are excellent.

Debt-To-Equity

Cash

Long-Term Debt

SFLY

0.00

$89.99 Million

$0

FB

0.17

$9.63 Billion

$1.99 Billion

 

T = Technicals on the Stock Chart Are Strong     

Shutterfly has outperformed the S&P 500 for every time frame listed below. For what it’s worth, Shutterfly has also outperformed Facebook (NASDAQ:FB) for every time frame listed below, but Facebook isn’t a direct competitor.

1 Month

Year-To-Date

1 Year

3 Year

SFLY

25.97%

35.29%

42.54%

128.80%

S&P 500

3.19%

6.12%

14.93%

51.06%

FB

1.11%

9.24%

1.54%

N/A

 

At $40.40, Shutterfly is currently trading above all its averages.

50-Day SMA

30.16

100-Day SMA

29.74

200-Day SMA

29.50

 

E = Earnings Have Been Inconsistent           

Earnings have been inconsistent on an annual basis. Revenue has steadily improved over the past five years, though 2012 revenue and earnings aren’t included in this chart. That information can be found in the Catalyst section.

2007

2008

2009

2010

2011

Revenue ($)in millions

186.73

213.48

246.43

307.71

473.27

Diluted EPS ($)

0.36

0.14

0.22

0.59

0.40

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

76.52

263.75

91.29

99.02

98.54

Diluted EPS ($)

-0.29

1.07

-0.29

-0.27

-0.29

 

T = Trends Support the Company, Not the Industry

There has been consolidation in the market for web-based photo services, which benefits Shutterfly and should help improve revenue.

Conclusion

There are a lot of positives for Shutterfly. They include consistently strong top-line growth, annual sales that are expected to rise as much as 17 percent, an excellent balance sheet, strong cash flow, and impressive stock performance. There is room for improvement with margins, but the biggest danger sign is a Forward P/E of 82.45. However, future growth will be strong, which should help with valuation.

When taking into account future growth and current circumstances, the stock seems to be fairly valued at the current time. Shutterfly is a WAIT AND SEE.

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