My 14-year-old son is currently in the throes of his first
They've been classmates from time to time since they were four,
but now that they are starting to notice each other, they mostly
communicate through text messaging. They don't talk at school or
passnotes like we did back in the dark ages. I don't know if it's
possible to wear out the screen on a smartphone, but my son is
making a good run at it. That's just how the younger generation
operates these days.
There's no denying that more often than not, thestock market can
behave exactly like a 14-year-old: surprising and delighting at
times but frustrating and inexplicable at others. You'll see a
great stock with a solid business operation and a history of
attractivedividend payments. Then, for whatever reason, the
market decides it doesn't like the stock.
Until it falls in love with it again.
Such is the case with postage meter titan
Pitney Bowes (
. Covering this stock is becoming an annual exercise of mine, as
you can see here and here. I've never stopped noticing the
company and the stock. But now the market is starting to catch
If you were a believer of theupside potential for this stock
at $10.50 a share, then you've made nearly 50% on yourinvestment
, not counting the nearly 10%dividend yield you're collecting for
But is it too late to jump in? No. The company continues its
metamorphosis from an old-line, manufacturing caterpillar to a
beautiful, high-tech butterfly.
The writing on the wall
More than a decade ago,
made a wise and conscious decision to transform themselves from
hardware manufacturing companies to software and service
enterprises. Take a look at what happened to IBM as a result of
In 1993, IBM was flat on the mat. It appointed Lou Gerstner
asCEO to take over and begin the company's transition.
Two decades later, after selling its PC business to Lenovo in
2004, IBM's information technology services represent more than
50% ofrevenue . Smart investors who believed in the company's
transformation have earned an annual average of 65% during the
past 20 years -- before dividends.
Now Pitney Bowes is following the same model.
In December 2012, Pitney's board hired Marc B. Lautenbach as
president and CEO. Ironically, Lautenbach has spent the past 30
years of his career at IBM.
Out with the old and in with the new
Pitney's "new" business is hardly an old-line business.
Primarily, it's software driven. The cornerstone is an
e-commerce/cloud platform the company has been ramping up quietly
but steadily. Pitney also provides geolocation software that
powers Facebook's "check in" feature.
According to my source inside the company, there are no current
or articulated plans to spin off or sell the postage hardware
business. However, doing so would generate an enormous pile
ofcash the company could use to expand the software/service
business or even return to the shareholders in the form of
dividends or stock buyback.
Pitney's previous management also implemented a restructuring
program in 2009 that is starting tobear fruit. Among the main
changes, the company sold off its international mailing business
to a privateequity firm. I think that was a test run for the
The results of theturnaround
The company reported 2012 revenue of $4.9 billion, a decrease
from $5.3 billion in 2011. This was mainly due to the continuing
decline of physical mail as a communication medium. Its "new"
business of software and services contributed 53.2% while
hardware postage meters and related products from the "old"
business contributed 46.5% to the cause.
And although these two divisions contribute about the same
toward revenue, the real story is in the company'sprofit margins
. The old business earned agross profit margin of just about 2%
in 2012, while the new business turned in gross margins of nearly
Take into account that Pitney has been able to retire more than
$500 million in debt during the past two years. It has also
bought back 4.7 millionshares of its stock, a transaction worth
up to $50 million. Its dividend has also been rising each year
for the last 24 years.
With all of this in mind, Pitney Bowes sharesoffer an excellent
opportunity in the near and long term.
Risks to consider:
Manyfactors could derail the company's future. Among them
would be a softening of the country's evident economic recovery,
failure to execute the turnaround plan, or just the sheer
unwillingness of those within the organization to change.
Luckily, the stock's low valuation, strongfree cash flow and fat
dividend offer some downside protection.
Action to take -->
Having said that, with the IBM background the new CEO has, the
odds look good for Pitney Bowes. The shares have had an amazing
44% climb in the first quarter of this year, but there's still
room to move. The stock currently trades at around $15.40, yields
close to 10% and has a forward price-to-earnings (P/E ) ratio of
7.9, which is less than half that of the S&P 500.
Based on the turnaround strategy in place, shares could climb to
$20 during the next 12 months, resulting in a forward P/E
expansion to 9. That would be a nearly 30% upside from current
levels. Throw in the dividend yield and the potential total
return is closer to 40%. However, if the transition is
successful, then the potential returns could be much richer in
the longer term.
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