Cheers to These Cliff Stocks!

By Steve Van - January 16, 2013 | Tickers: TAP, PBI, POOL, STMP | 0 Comments

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This past New Year’s Day, exhausted from weeks of hearing about the the fiscal cliff, I was flipping between college football bowl games and a Cheers marathon when one of the best episodes of the whole series came on. It was the one where Cliff Clavin (a cliff I could actually tolerate that day) was a contestant on Jeopardy. The lonely, middle aged, still living at home, know-it-all, always in uniform mailman could hardly believe his luck when the categories were revealed. They were: “Civil Servants," “Stamps From Around The World," “Mothers and Sons,” “Beer,” “Bar Trivia,” and “Celibacy."  In other words, Cliff’s perfect board. Predictably, and unforgettably, Cliff’s hilarious “Final Jeopardy” response blew his insurmountable lead and sent him home in a rage.

So, in celebration of the hapless barfly, here are some Cliff Clavin style stocks to consider: Pitney Bowes (NYSE: PBI), Stamps.com (NASDAQ: STMP), Anheuser-Busch InBev (NYSE: BUD), Molson Coors Brewing (NYSE: TAP), and Pool Corp. (NASDAQ: POOL).

Postage
Pitney Bowes, the iconic postage meter company, has been forced by shifts in technology and mail delivery methods to reinvent itself. As an approved vendor of the highly regulated U.S. Postal Service, the company historically enjoyed significant competitive advantages but is now transforming itself into a digital communications company. This move to new businesses has exposed the company to greater competition where it lacks clear competitive advantages. A new CEO was named in December and inventory turnover was improved by the company over the past 5 years, helping to stem the decline in cash flow, but the company has a withering franchise.

The metrics are downright ugly: revenue down 3.7% annually over the past 5 years; gross margin and operating margin down, on average over the past 5 years, to around 51% and 12%, respectively, from 54% and 19% the previous 5 years; stockholders’ equity that has declined by about 90% since 2005 and is now minimal; a dividend payout ratio that has expanded to more than 80% from an average of less than 60% from 2002-2007. In addition to these metrics, the company has increased dividends by almost 3% and reduced outstanding shares through repurchases by more than 8% over the past 5 years, even as operating cash flow declined by more than 3%. Shareholders would have been better served with a dividends-only capital allocation strategy, as the average share price over the past 5 years is around $23 ($19 adjusted for dividends), significantly above the current price near $11.40. As things stand now, the only glimmer of hope I see is the new CEO’s ability to execute a turnaround.

Stamps.com has achieved results that are striking in contrast to its main competitor, the much bigger Pitney Bowes. Stamps.com has a market capitalization of just $400 million compared to Pitney Bowes' $2.3 billion, but has grown revenue by 4.4% annually over the past 5 years. Gross margin has improved to more than 72% over the past 5 years from about 67% for the previous 5 year period. Similarly, operating margin has improved to an average of slightly less than 8% over the past 5 years from negative territory during 2002 to 2005. These results are being driven by a growing customer base as a result of customer acquisitions, a stable churn or customer attrition rate, and increasing revenue per sales unit. For the third quarter of 2012, the company’s acquisition rate was up 8% year over year in its core PC Postage segment, while the churn rate was up 0.2% to 3.5% from 3.3% the prior year but down 0.2% from 3.7% in the second quarter of 2012. Average revenue per unit (ARPU) increased by 7% in the third quarter of 2012 over the prior year.

The disparity in operating results between Stamps.com and Pitney Bowes has been matched by a disparity in total return to shareholders. Over the past 1, 3, 5, and 10 year periods, Stamps.com has returned approximately 1%, 44%, 18%, and 13%, respectively, compared to losses for each period for Pitney Bowes. With a price to earnings to growth (PEG) multiple of 0.9x, Stamps.com is reasonably priced.

Beer
Anheuser-Busch InBev and Molson Coors are the number one and two brewers in the United States and Canada, and currently they both trade at forward PEG multiples of less than 1.0x. Although their PEG multiples are similar, analysts’ consensus estimates of EPS growth for Anheuser-Busch are much higher than for Molson Coors. There are also other factors that distinguish the two companies, including size and scale, with Anheuser-Busch having a market cap of $140 billion, or more than 18x Molson Coors at $7.5 billion.

Anheuser-Busch trades at a forward PE of about 17x and is expected to grow EPS by almost 18%m whereas Molson Coors carries a much smaller forward PE of 9.6x but is expected to grow its EPS by only 10% annually over the next two years. Both companies face the threat of substitution from competing craft brewers and spirits makers, and continued economic weakness hurts both companies, so Anheuser-Busch’s higher growth outlook is due primarily to its exposure to the Latin American beer market. This divergence in expected growth is warranted also based on Anheuser-Busch’s recent higher growth rates of income, cash flow and revenue. Specifically, while maintaining its profit margins, Anheuser-Busch has grown revenue, operating income, and net income by approximately 18%, 32% and 45%, respectively, annually since 2008. By comparison Molson Coors has achieved annual growth in operating income and net income of 13%, and 20%, respectively, despite an annual 10% decline in revenue as the company has been able to boost its gross and operating margins. There is currently no compelling reason to believe Molson Coors will begin to catch up to Anheuser-Busch’s growth rate.

Pool
Ok, I concede that a pool supplies wholesaler like Pool Corp. does not fit my definition of a Cliff Clavin type stock, but remember that he and Norm often played pool in Cheers’ back room. With that flimsy connection, let’s look at Pool Corp.

Due to the weakness of new swimming pool installations after the financial crisis, the company has shifted its focus to maintenance and repair products which account for 70% of revenue and gross profit. The remaining 30% of business is pool construction & replacement and landscaping. Most of Pool’s customers are small, family-owned businesses, and this gives Pool pricing power that is reflected in a gross margin which has improved to an average 29.2% since 2008 from a historical average closer to 27.6%. Unfortunately, operating expenses have not been kept in check and operating margin has slipped since 2008. Another concern is the concentration of sales with 50% of revenue coming from just 4 states: California, Florida, Texas, and Arizona.

Pool is attractively priced at a recent PEG of just 0.9x based on consensus forward growth estimates of 22% and a forward PE of 20x. The housing market, which seems to be gaining traction, is a big driver of Pool’s fortunes, especially in California, Florida, Texas, and Arizona. Despite this improvement and despite the reduction in Pool’s share count, 22% EPS growth is aggressive given that this would put 2013 EPS at $2.20, or more than 25% above the peak EPS earned in 2006. Adjusting for the current number of shares, estimated earnings are still pegged at more than 11% above the peak of 2006 which I believe is unlikely.

Anheuser-Busch and Stamps.com are reasonably priced, and their operating metrics and growth prospects make them worthy candidates for further due diligence. Molson Coors and Pool Corp. do not have intriguing growth prospects in the current economic climate, but each has investment potential should a growth catalyst emerge or if either company’s share price drops excessively in a broad market decline. Each company offers a dividend, but only Molson Coors, with a 3.0% yield, is worth holding while waiting for a turnaround in the economy. As for Pitney Bowes, I’ll paraphrase Cliff’s classic “Final Jeopardy” response: What is 1 stock that has never been in my portfolio (and probably never will)?

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