The IPO seemed perfectly timed, the investment thesis so compelling: CPI Card Group Inc., already the top U.S. maker of credit cards, would ride the wave of new EMV "chip" cards to higher sales and profits. Analysts predicted a tidy gain over the $10 (U.S.) initial price.
Instead, this stock has been a disaster for public investors and its Canadian sponsors, who have taken a 90-per-cent cut from its IPO price in the fall of 2015. Earnings misses and guidance cuts, first in 2016 and again earlier this month, have shattered investor confidence. The dividend is gone. The debt raters have cut their view on CPI Card Group's creditworthiness, with the company unable to access the full amount of its credit line.
This horror story could end in a total wipeout – or remarkable returns, for the investor willing to risk all. After all, CPI Card Group's closing price of 95 cents on Wednesday is less than its adjusted earnings per share of just 18 months ago.
Let's step back in time to a place where things looked much, much better. In October, 2015, CPI Card Group went public, backed by Canadian private-equity firm Tricor Pacific Capital Inc. (now known as Parallel 49 Equity) went public on the Toronto Stock Exchange and the Nasdaq. CPI Card Group, based in Littleton, Colo., was (and is) the largest maker of financial payment cards in the United States, with customers, such as banks, credit unions and credit-card issuers, that averaged a 13-year relationship.
Analyst Stephanie Price of CIBC World Markets, who initiated her coverage in November, 2015, with an "outperform" rating and 12-month to 18-month target price of $14, said there are significant barriers to entry in the card-manufacturing business, with no new entrants in the prior decade. More importantly, the United States was about to become the last country in the Group of 20 to move away from magnetic-stripe credit cards and adopt chip cards to cut down on fraud. Conceivably, every credit card in the debt-happy United States would need to be replaced, at a cost of $1 a card instead of the 20 cents card issuers normally paid for mag-stripe models.
Ms. Price's outlook was for 15-per-cent sales growth into 2017, during the conversion, and more sales gains possible later as "dual interface" tap-and-pay cards began to debut, all yielding 20-per-cent growth in EBITDA, or earnings before interest, taxes, depreciation and amortization.
What happened next was unanticipated. In May, 2016, the company's second earnings release as a public company, the company cut its 2016 revenue guidance by more than 20 per cent and its "adjusted EBITDA" guidance by more than 30 per cent. (The company excludes stock compensation, currency effects and other supposed one-time items from EBITDA for this measure.)
The problem was twofold, management said. First, large card issuers (banks, card companies, etc.) had unexpectedly large unissued card inventories heading into 2016, curtailing their new purchases. Then small and mid-sized card issuers converted to chip technologies more slowly than anticipated.
That news sliced the company's shares in half – down below $4 – and analysts including Ms. Price cut their recommendations from buys to holds.
But the damage wasn't done. This month's disappointment, a continuation of past trends, combined falling demand and pricing pressures with an actual loss of market share as competitors beat CPI Card Group on pricing. It added up to a forecast for negative free cash flow for 2017. The company eliminated its dividend, and the debt-to-EBITDA ratio more than doubled. Ms. Price, who had already cut her rating to "underperformer," CIBC's equivalent of a sell, politely said she had "limited visibility to the company's growth trajectory." Her new target price is $1.50, down from $2.50, but investors sent the shares below $1 this week.
Is that fair? There's little question that, as BMO Nesbitt Burns analyst Paulo Ribeiro says, "Confidence in management has taken another big hit," and investors who are looking for stable returns should stay far, far away.
What intrigues, however, is the earnings capability this company had not so long ago. CPI Card Group posted EBITDA of $85-million to roughly $95-million, depending on who's counting, in 2015. With about 55 million shares outstanding, currently, that's $1.50 to $1.75 a share. Free cash flow (operating cash flow minus capital expenditures) was $25-million that year.
Mr. Ribeiro and Ms. Price see positive earnings per share in 2018 (19 cents and 27 cents, respectively), although, to be fair, the forecasts for CPI Card Group have been entirely too optimistic. Something resembling those numbers would put CPI Card Group's price-to-earnings ratio below five.
That's too expensive for a company going down the tubes – but an intriguing price point for a company that may have reached bottom on its way back up. The risk involved, however, means investors need to be using their play money, versus plastic, to pay for shares in this troubled card maker.
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