If This Company Survives, Investors Will Prosper

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

I recently wrote about a few interesting dividend stocks that the value-focused managers of Dodge & Cox Stock Fund were holding in their portfolio. Of the stocks I highlighted, by far the most aggressive was Pitney Bowes (NYSE: PBI)

Change is Hard
New technology has cast a dark cloud over the Pitney Bowes' image and long-term prospects, though its legacy business is still throwing off large amounts of cash as it slowly fades. As the main player in postage meters and traditional mail products and services, it isn't hard to understand the negative image surrounding the company, since digital distribution is clearly increasing in importance while regular mail is disappearing.

However, the company hasn't stuck its head in the sand. It is actively trying to move into the digital space, using the still substantial cash flows from its legacy business to fund the transition. It is a risky move and the company could be so late to the game that it will have a hard time competing.

There is a lot of uncertainty, but there is also a huge potential reward. If the company does manage to make the transition, which is not unthinkable based on its strong customer base, shares would recover smartly. Moreover, its dividend yield is massive and is backed by a still financially strong company with a long history of dividend increases. So if things go well, there's a lot to gain. If the company falters, however, the shares could go lower still and the dividend could wind up getting cut.

A SWOT is Worth a Thousand Words?
With these facts in the back of my mind, I wanted to get a clearer picture of Pitney Bowes as a company. One of the first tools I bring out is a strengths, weaknesses, opportunities, and threats analysis (SWOT). Strengths and weaknesses are internal to the company, while opportunities and threats are external factors. All you need to do to create a SWOT is to take some time to think critically about each of these factors as they relate to Pitney Bowes. Here's what I came up with:

Strengths (Internal)

  • Largest player in the traditional mail services space.
  • Many customer relationships.
  • Management is aware of and working to deal with the slow decline in its mail business.
  • Significant marketing database capabilities.
  • Mail business continues to generate material cash flow.

Weaknesses (Internal)

  • Large amount of debt.
  • Mail business is slowly dying.
  • Late entrant in the digital space, so haste is of the essence, which can lead to missteps.

Opportunities (External)

  • Increasing use of digital communications.
  • Traditional mail communications unlikely to go away completely.
  • Customers may desire a close connection between traditional mail and digital communications to increase value of advertising efforts. 

Threats (External)

  • Financial difficulties at the U.S. Postal Service could lead to cuts or, in a worst case scenario, complete closure.
  • Digital space is highly competitive with few barriers to entry.
  • Long-term, secular move to digital communications.

Some Thoughts on the SWOT
What I found most interesting here is that Pitney Bowes' big opportunity is also its biggest threat: digital communications. If it can make the shift successfully, it wins. If it can't, it probably dies a slow death. The fact that it is coming late to the party is a big concern, since it has had to use mergers and acquisitions to make up lost ground.

M&A is great when it goes well, but mistakes get made when you move too fast. This could mean purchasing a company that later proves to have undesirable technology and/or making mistakes during the integration process. Either could lead to substantial top and bottom line issues.

There are Others In the Room
Of course the technology space is full of companies that are both creative and disruptive. For example, a company like Constant Contact (NASDAQ: CTCT) was only created a few years ago but has already made a huge name for itself. And, its email services make it easy for anyone to create, manage, and send communications to customers and potential customers. Its got a large following in the small business arena.

Google's (NASDAQ: GOOG) Adwords is another competitor, only this one has a massive distribution network that Pitney Bowes could never hope to replicate. Need to get an ad in front of a web denizen? You go to Google first. Small businesses and large make extensive use of Google's ad network.

Even worse, Stamps.com (NASDAQ: STMP), which sells postage digitally, is using technology to encroach on Pitney Bowes turf. It has made a solid foothold in the small business space selling postage over the internet. Although it, too, requires the U.S. Postal Service to survive, it would likely benefit from the shrinking of the U.S. Post Office, since more people would likely use its services to buy postage that they used to acquire from brick and mortar post offices.

The Old Dog Still Knows Some Good Tricks
One thing that Pitney Bowes may be able to benefit from is the disparate nature of the three services above, and the many others that are in existence. For example, a customer would need three different relationships to get postage and handle traditional mail (Stamps.com), digital communications (Constant Contact), and targeted online advertising (Adwords). Making sure that everything was running smoothly across all three requires a great deal of effort. If Pitney Bowes can simplify that process, it might just have the right sales pitch to convert current customers to its new platform that is intended to transcend print and digital.

The company's high yield makes sense because this is a high stakes game Pitney Bowes is playing. Only aggressive income-oriented investors should participate.

ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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