20% Just Isn’t Enough to Save This Company
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The story of a company that's trying to turn around usually takes on a familiar tone. Tell me if this sounds familiar, “(we are taking) actions to enhance our balance sheet and capital allocation flexibility and exiting some non-strategic businesses.” Let me translate, we don’t have enough cash flow, we need to cut our debt to get out of trouble, and selling some of our businesses is the only option we have. The earlier quote is from the CEO of Pitney Bowes (NYSE: PBI) Marc Lautenbach, and unfortunately, the company’s business keeps getting worse.
What Could Have Been
Ironically, Pitney Bowes competes with several companies that are trying to write their own turnaround stories. For instance, the printing and data management capabilities puts Pitney Bowes in competition with Hewlett-Packard (NYSE: HPQ), Xerox (NYSE: XRX), and Siemens (NYSE: SI).
What’s interesting is, Pitney Bowes and their peers are all being pushed to the limit by some of the same trends. The rise of tablets and smartphones is changing the landscape. Businesses and individuals used to use desktop computers and keep paper records of everything. However, with e-mail, tablets, and smartphones, paper records are going by the wayside as fast as the traditional desktop.
In addition, businesses and individuals are moving away from physical mail and toward social networking and other methods of communication. When companies begin offering benefits from going paperless, they are essentially taking a shot directly at Pitney Bowes and its troubled peers.
Before And After
The biggest difference between Pitney Bowes today versus prior to their dividend cut is the stock’s potential return has changed dramatically. About a year ago, Pitney Bowes paid a yield of more than 10%, and analysts expected earnings growth of about 4% to 6%. With a double-digit yield and low single-digit earnings growth, the stock looked extremely cheap.
Things have changed over the last 12 months. Pitney Bowes now yields 5.4%, but what is worse is now analysts expect earnings to contract by 6%. This means all things being equal, Pitney Bowes offers investors a total expected return of negative 0.60%. Everyone knows that Hewlett-Packard has problems of its own. However, the company pays a yield of 2.3%, and analysts expect earnings to stay flat over the next few years. Even a 2.3% return is better than a negative return.
Xerox offers a slightly better option, with a yield of about 2.3%, but with an expected growth rate of about 6.6%. Even better still is Siemens pays a higher yield of 2.7% and earnings growth in the double-digits. In short, on a sheer yield and growth basis, Pitney Bowes is a worse value than any of their peers.
Failing to Deliver
Everyone pretty much knows that Pitney Bowes is struggling with lower mail volumes. In the past, I could accept this risk as long as they could keep their free cash flow generation intact. However, with every passing quarter, Pitney Bowes is putting investors in a more and more difficult situation.
A year ago, Pitney Bowes suggested that they would generate around $900 million in free cash flow for 2013. A few quarters ago, the company lowered expectations to about $700 million to $800 million. Unfortunately for investors, in the company’s last quarter, this guidance was lowered once again to a range of $600 million to $700 million. While this cash flow would seem to more than cover the company’s now lowered dividend, what if the company’s free cash flow guidance continues to drop?
Speaking of Pitney Bowes' lower cash flow, the company’s payout ratio is still worse than its peers at about 44%. Relative to payout ratios of 19% at Hewlett-Packard, 11.3% at Xerox, and 32% at Siemens, all of Pitney Bowes' competition is in better shape.
Comparing Pitney Bowes’ balance sheet to their peers, the company carries over $3 billion in net long-term debt compared to at most $175 million in quarterly free cash flow (at $700 million per year). This means Pitney Bowes is carrying debt that is over 17 times their quarterly free cash flow.
By comparison, Siemens carries $15.75 billion in long-term debt, but generated $1.9 billion in free cash flow last quarter, or a ratio of 8.29. Xerox has about $1.9 billion in net long-term debt and generates $540 million in free cash flow, for a ratio of 3.52. The best positioned company is Hewlett-Packard, with not only $1.48 billion in quarterly free cash flow, but also over $3.5 billion in net cash and investments.
The biggest problem facing Pitney Bowes is only 20% of their business is growing. Of their seven divisions, only two showed growth in revenue. Big picture, investors get a negative total return, decreasing cash flow expectations, a huge debt load, and 80% of the business reporting declining revenue. Sorry Pitney Bowes investors, but this may be a company that is beyond saving.
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Chad Henage has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!