This Stock Is a Value Pick for 2013

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A stock that had lost almost 44% in 2012, has gained nearly 12% since the advent of the New Year, and is expected to rise further and gain a bit of the lost ground. Pitney Bowes (NYSE: PBI) seems a good value pick for 2013 with promising returns compared to the risk.

Business Overview

Pitney Bowes is in the business of providing mail processing equipment, software, hardware and integrated mailing solutions. Pitney Bowes is a household name in the mailing industry, having been founded way back in 1920 and publicly listed in 1950. The company has a market capitalization of $2.4 billion and has over 28,000 employees with business in more than 100 countries. The business is organized into seven reporting segments within two business units.

Small & Medium Business Solutions (SMB Solutions) constitutes United States mailing and International Mailing. This includes revenue from sale, rental and financing of its mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services, and payment solutions. The division contributes nearly 50% of the total revenues ($2,669 million) and more than 76% of the operating profits ($827 million) with high operating margins nearing 30%.

Enterprise Business Solutions (EB Solutions) constitutes Production Mail, Software, Management Services, Mail Services and Marketing Services. The business unit contributes revenue of $2.6 billion and $261 million of operating profit. Though the business unit as a whole is a comparatively low margin business with operating margins of only 10%, the Mail Services and Marketing Services generate higher margins for the firm.

Competitive Positioning

  • The most significant advantage the company has is a portfolio of over 3000 patents relating to its business.
  • The company also has a very high market share in the postal metering industry in both the US and in other International markets.
  • The barriers to entry are also very high, since it is a highly regulated industry.

Strengths

  • Stable Dividend policy

The company has a stable dividend policy with dividends as high as $1.52 compared to share price of $11.91 (as of closing Jan 11) thus resulting in a high dividend yield of 12.5% at the time of writing. This has been achieved due to the continuous increase in the cash flows, despite falling revenues and continuously falling stock price relative to the stable dividend payouts.

  • Share buyback

Though the company did not buyback any stock in 2012, it has purchased over $80 million worth of stock in 2011, and is expected to purchase more stock in 2013 thereby helping to prop-up the stock price. The company has bought back almost 3% of the total shares outstanding in the past 3 years.

  • Large patent portfolio

An enviable portfolio of almost 3000 patents related to it line of business.

  • Extremely low valuation levels

The stock is currently trading at a P/E (price to equity) ratio of 6.5 compared to Industry average of 14.77, and a P/S (price to sales) of 0.47 compared to Industry average of 0.89, thus leaving scope for considerable rise in the current financial year.

  • High RoE

The return on equity for the stock is a herculean 935.47 compared to the industry average of 6.04.

  • Stable operating margins

The operating margins have been relatively stable at a healthy 17% over the past 3 financial years.

Investment Risks

  • Declining revenues & Negative growth rate forecasts

According to the Consensus estimates, the revenues are expected to drop to $4.864 billion for 2013 as compared to revenue of $5.197 billion in 2012, and are expected to further decline at a rate of 2% over the next 5 years.

  • Fears of dividend cut

The revenues and earnings in the mail industry have been steadily declining over the past few years and more than 50% of Net profit is already being doled out as dividends.

  • Decline of Physical Mail

With the advent of Internet and new technologies, the volume of physical mail has been steadily declining over the past 10 years, however the company has initiated sever new initiatives to counter the decline including selling software to complement its traditional mailing services.

  • High Debt levels

Another serious threat to the investment is the relatively high debt levels. The company has a debt of nearly $3.68 billion leading to a Debt to equity ratio of over 900.

Key Competitors

Some of the direct competitors to Pitney are Siemens AG (NYSE: SI) and Xerox Corporation . Both companies are relatively bigger in size with revenues topping $95 billion for Siemens and $9 billion for Xerox. Both companies have an operating margin of less than 9% compared to 17% for Pitney. Their P/E's are also much higher (17 and 13 respectively) compared to 6.5 for Pitney.

My Opinion

The Median price target for Pitney is $15.00, which leaves enough room for nearly 25% returns from the current price levels, making it a very attractive buy. The company also has a very attractive dividend payout, despite the high debt levels and declining earnings. Moreover, though the core business is expected to shrink in the coming years, its effects are already factored into the stock price, and thus is a very good buy in the author’s opinion.


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