On Aug 23, we maintained our Underperform recommendation on
Piney Bowes Inc.
). We appreciate the company's better-than-expected earnings
performance in the second quarter of 2013. However, the continued
weakness in Production Mail and Management Services segments and
decline in the Small and Medium Business Solutions (SMB) revenue
streams have been a drag on the company's revenues.
Why the Reiteration?
On Jul 30, Pitney Bowes reported second-quarter 2013 pro forma
earnings per share of 52 cents, which was 15.6% above the Zacks
Consensus Estimate of 45 cents. Quarterly earnings were up 1.9%
year over year from 51 cents per share. Earnings for the second
quarter 2012 exclude goodwill impairment charge of 40 cents,
restructuring charges of 7 cents and loss of 10 cents due to
Total revenue for the second quarter was $1.16 billion, down
0.7% from $1.17 billion in the prior-year quarter. The top line
benefited from double-digit growth in the Production Mail and
Mail Services segments. International Mailing revenues were flat
year over year. This was offset by lower recurring revenues from
the SMB group, lower licensing revenues in the Software segment
and lower revenues due to continued pricing pressure on some
contract renewals in the Management Services segment. Revenues
for the quarter were below the Zacks Consensus Estimate of $1.18
Following the release of the second-quarter results, the Zacks
Consensus Estimate for fiscal 2013 declined 5.4% to $1.76 per
share. Moreover, the Zacks Consensus Estimate for fiscal 2014
also contracted 7.7% to $1.69 per share.
The demand for postal services is experiencing a continuing
decline. Digital and electronic forms of mailing have substituted
for the postal services, which is a threat to Pitney Bowes'
revenues and profitability. Although Pitney has ventured into new
products as an alternative to postal services, we remain
skeptical about the success of these low-margin products.
In addition, the company's free cash flow is being impacted by
higher working capital requirements. Significant amount of cash
($86 million) was used for investing activities during the latest
reported quarter (2Q13) compared with just $14 million in the
second quarter of 2012. Cash and cash equivalents also dropped to
$608.6 million during the quarter from $913.2 million in the
Further, Pitney lowered its guidance for 2013. For 2013, the
company expects revenues, excluding the impact of currency, to
range from a decline of 1% to a 2% increase. Revenue guidance was
lowered from the previous guidance of flat to up 3%. The company
expects earnings per share from continuing operations to be in
the range of $1.62 to $1.77 a share, as against the $1.85 to
$2.00 range mentioned previously. Free cash flow for 2013 is
expected to be in the range of $575 million to $675 million
compared to the previous guidance range of $600 million to $700
However, Pitney Bowes has been divesting its non-profitable
businesses in order to become a more focused company. Following
the earnings release, Pitney Bowes announced its plan to divest
its North American management services unit to Apollo Global
Management for $400 million. In May, the company announced its
plan to sell the management services business wing in the United
Kingdom and Republic of Ireland to Swiss Post Solutions. The
financial terms were not disclosed.
Other Stocks to Look For
Pitney Bowes carries a Zacks Rank #4 (Sell), which further
justifies our recommendation.
Some other stocks that are performing well in the industry and
worth considering at the moment are
CommVault Systems Inc.
). All three carry a Zacks Rank #2 (Buy).
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