Top Ten Most Shorted Stocks: Pitney Bowes

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

A recent survey of the top ten most shorted stocks in the S&P 500, found Pitney Bowes (NYSE: PBI) coming in at #10. The company currently has about 16.43% of its outstanding shares sold short. My contrarian nature makes me think there might be opportunity where others see problems. Let's look at Pitney Bowes a little more carefully and see what's going on.

Pitney Bowes

Current Price: $18.56
P/E based on '12 earnings: 8.59
Growth expected: 6.70%
PEG: 1.28
Yield: 8.08% 

The biggest obstacle Pitney Bowes faces is the continual decline of the postal industry. In particular, when it comes to letters and flats, volumes are down. This directly affects the demand for postal meters. Since postal meters are Pitney Bowes' largest profit center, this is at the heart of why the stock is being shorted. The company's decreased earnings in the last few years are proof of the challenges they are facing.

There are several bright spots that stand out for Pitney Bowes. The first of which, is the company has managed to beat earnings expectations 2 of the last 4 quarters. The company is expected to grow at 6.70% for the next few years. If the company can manage to meet or exceed estimates as it has, the stock could be a decent value.

The primary reason to buy the stock today is the dividend yield. This is a major argument against shorting the stock as well. Anytime you see a dividend yield of over 8% you have to be concerned about sustainability. Pitney Bowes dividend appears sustainable with a cash payout ratio of about 36%. The company has generated an average of $221 million in positive cash flow in the last 4 quarters. With the additional cash flow the company has repurchased shares in 2 of the last 4 quarters as well.

Pitney Bowes balance sheet is the other major argument for shorting the stock. The company currently has about $4.2 billion in long term debt and negative equity. The company does have about $2 billion in cash and investments, but this debt burden is weighing on the stock. Management doesn't seem to understand this issue either, as the long term debt amount has remained virtually unchanged in the last year. One would have to believe that shareholders would prefer this long term debt be paid down, as opposed to share buybacks.

On a technical basis Pitney Bowes is down nearly 30% from its 52 week high. In the last 6 months the shares have hit a low of about $17.35 and appear to have support at around their current price.

Pitney Bowes, while one of the oldest, is not the only company to offer in-home or in-office postage solutions. As an example, Stamps.com (NASDAQ: STMP) also offers the ability to print postage directly. While Stamps.com can't compete on dividend yield as they don't pay one, the company has a much higher expected growth rate. Stamps.com is expected to grow at over 18% going forward. In addition Stamps.com has consistently beaten earnings estimates. While more expensive at a little over 23 times forward earnings, the company has no long term debt, and is cash flow positive.

Pitney Bowes is a stock I would not short due to the high dividend and positive cash flow. With the stock down about 30%, and showing support around current prices, there doesn't seem to be a lot to gain by shorting it here. However, I'm not convinced enough to recommend going long on the company either until their balance sheet improves. A merger with a company like Stamps.com would seem a perfect fit and would improve Pitney Bowes growth rate and diversify their revenue. The challenge of course is with $4.2 billion in debt, Pitney would likely have to issue stock and potentially cut the dividend to make a merger like that occur. I can't put a green thumbs-up on CAPSCall until the balance sheet improves. I'll be watching earnings to see if management starts to address the debt issue. Let me know what you think in the comments section below.


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