by Susan J. Aluise | November 9, 2012 11:40 am
Now that the election is finally over, we can bid farewell to wrestling armfuls of political direct mail out of our mailboxes every day. But with the Obama and Romney campaigns alone having spent upwards of $170 million on direct mail, our gain could further strain the earnings of mail services giant Pitney Bowes (NYSE:PBI).
That’s because despite all the forests that died nobly during Campaign 2012, mail volume trends don’t favor the 90-year-old provider of integrated mail services and processing equipment. PBI specializes in providing high-volume mailing services like sorting and production, and it sells mail generation, production print and shipping equipment and software.
That’s great — if companies are mailing out tons of catalogs, circulars and bills, but the Internet and digital business growth have changed that paradigm. So, let’s break down the mail services industry’s 800-pound gorilla and find out whether it makes sense to pick or pass on PBI.
Sky-High Dividend Yield. No doubt about it, PBI’s current dividend yield of 11.8% makes this stock impossible to ignore. What potentially makes it even more attractive to income investors at or nearing retirement is the fact that it has consistently paid a dividend since Franklin Delano Roosevelt’s first term as president — and has reliably increased that dividend for the past 30 years. (PBI’s current yield tops InvestorPlace‘s list of Dependable Dividend Stocks.)
Cost Reductions. PBI Chairman and CEO Murray Martin has been relentless in cutting costs and boosting efficiency. The company’s Strategic Transformation program so far has delivered about $300 million in net annualized savings, and Martin sees room for an additional savings of $45 million to $55 million. PBI said earlier this month it will exit its International Mail Services business, which ships catalogs and related mail, reflecting the difficulties in the global economy.
New Business Initiatives. As its customers move away from traditional mail, Pitney Bowes is moving to capitalize on growth areas like cross-border electronic commerce. To that end, its new e-commerce group has expanded an existing relationship with eBay (NASDAQ:EBAY) to support cross-border shipping from the U.S. to 18 countries.
Another promising initiative is its new Volly secure digital delivery service, which will allow consumers to access all their bank, credit card and other accounts from a single digital site. So far, PBI has inked deals with 60 large third-party mail service providers that will offer the service to 6,500 companies and consumer brands when it launches next year.
Rapid Erosion of Core Business. It’s no secret that mail volume is plummeting as businesses turn to digital alternatives. That’s why the U.S. Postal Service is circling the drain. Pitney Bowes is battling a double-whammy of sorts: declining mail volume and a longer-than-expected economic downturn. These factors have pummeled sales and earnings, particularly in the company’s software and international mailing and management services businesses.
That means PBI must drive a massive line-of-business transition at a time when its income is slipping. That’s a tough task, particularly since the company doesn’t have the luxury of time.
Disappointing Earnings. PBI’s third-quarter profit fell by a whopping 56%. Earnings per share sagged to 38 cents a share on $1.22 billion in revenue, down from 85 cents a share for the same quarter last year. Wall Street, which had expected EPS of 48 cents on a top line of $1.26 billion, punished PBI for the miss. The stock is down more than 17% since the Nov. 1 earnings report.
Challenging Performance Metrics. Other than the attractive dividend and low multiple (PBI is trading at less than 7 times forward earnings), there’s not a lot to like about this stock now. PBI is down 39% since February, and at around $12, it’s flirting with a new 52-week low.
Although it looks cheap, the stock has a price-to-earnings growth (PEG) ratio of 3.6, which suggests it’s very overvalued. PBI’s quarterly earnings growth is a disturbing negative – 55.7% and reflects the flagging fortunes of its core business.
Pass. PBI’s declining core business and urgent need to turn its business model on a dime to survive and prosper is a huge task at the best of times. With persistent global economic headwinds, the job is doubly tough.
Pitney Bowes will need to redefine its business, not only from mail services and software to digital services and e-commerce. It must then contend with more disruptive megatrends like cloud computing and mobile commerce. Despite its stellar dividend history, I wouldn’t bank on that 12% current yield being sustainable.
As of this writing, Susan J. Aluise didn’t hold a position in any stocks named here.
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