Pitney Bowes – Making Money in a No-Growth Business
Apr. 07, 2010
Author:
Dr.Paul Price
Pitney Bowes [NYSE:PBI - $24.70] is the worldwide market leader in postage meters and mailing equipment. The U.S. and Europe contribute about 68% of revenues and 84% of profits. Their ‘Services’ segment provides mail room, marketing and document management to account for the other 32% of revenues and 16% of earnings.
The rise of the internet has put a permanent damper on overall mail volume and PBI is no longer a growth story. Earnings from continuing operations came in at $2.28 /share in 2009 versus $2.32 in 1999 although EPS did peak at $2.69 - $2.76 in the period from 2005 – 2008.
The basic business remains a predictable cash-cow, however, and capital needs are not high. The company has gradually increased their dividend rate to $0.365 quarterly making for a juicy 5.9% current yield. In today’s close-to-zero interest rate environment, the dividend alone makes PBI shares a reasonable choice for income oriented investors.
Zacks, Value Line and Standard & Poors all expect $2.40 /share in 2010 earnings with a 2011 projected range running from a low of $2.47 (Zacks) to $2.60 (S&P). That puts PBI at about 10.3x this year’s and 10x the 2011 estimates versus their 10-year median P/E of 16x.
I don’t expect to see a sixteen multiple again but it doesn’t seem unreasonable to think PBI can trade at 11x – 12x normalized earnings over the next year or two. That leads me to a minimum 12-month target of $27.60 or about 11.7% above today’s quote. If it takes a year to get there you’ll have a total return of > 17% on a stodgy, low volatility [Beta = 0.9] company.
Is that rational? Standard and Poors carries a $27 one-year goal and rates PBI at 4-Stars (out of 5). Value Line sees a 3 – 5 year P/E of 12x in figuring their long-term price target and notes Pitney Bowes ‘earnings predictability’ falls in the top 1% of all companies from their 1700 stock universe. They also note PBI’s 90th percentile ranking for ‘stock price stability’.
PBI peaked at $27.50 in the disastrous 2008 market and traded at $40 and higher during each calendar year in the entire decade prior to that year. With slightly improved EPS likely and the yield support I see low risk and a high likelihood that my $27.60 goal can be achieved.
These are not ‘home-run’ shares. They can provide conservative investors with a total return many times greater than fixed income without a huge risk factor.
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Another way to play with PBI would be to buy shares while writing October puts and calls at the $25 strike price. Here’s how that would look if you set that up right now:
--------------------------------------------Cash Outlay----Cash Inflow
Buy 1000 PBI @ $24.70 /share -------------- $24,700
Sell 10 PBI Oct. $25 Calls @ $1.05 /share -------------------- $1,050
Sell 10 PBI Oct. $25 Puts @ $1.90 /share ----------------- $1,900
Net Cash Out-of-Pocket ---------------------- $21,750
If PBI shares rise by at least 1.3% to $25 or higher by Oct. 16, 2010:
· The $25 calls will be exercised.
· You will sell your shares for $25,000.
· The $25 puts will expire worthless (a good thing for you as a seller).
· You will likely have collected two $0.365 dividends x 1000 shares for $730.
· You will have no further option obligations.
· You will end up with no shares and $25,730 in cash.
That best-case scenario profit would be $25,730 - $21,750 = $3,980.
$3,980/$21,750 = 18.29% cash-on-cash achieved in less than 7 months on shares that only needed to rise by 1.3% or better.
What’s the risk?
If PBI remain below $25 on the October 16, 2010 expiration date:
· The $25 calls will expire worthless.
· The $25 puts will be exercised.
· You will be forced to buy another 1000 shares of PBI.
· You will need to lay out an additional $25,000 in cash.
· You will likely have collected $730 in dividends.
· You will have no further option obligations.
· You will end up with 2000 PBI shares and $730 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.70 purchase price less the $1.05 /share call premium = $23.65 /share.
On the ‘put’ shares it’s the $25 strike price less the $1.90 /share put premium = $23.10 /share.
Overall your break-even would be $23.38 /share (ignoring dividends) or $23.02 /share if you include the expected yield.
PBI could fall as low as $23.02 or (-6.8%) from the trade inception price without causing a loss on this trade.
Dr. Paul Price - www.BeatingBuffett.com
Disclosure: Author is long PBI shares and short PBI options.
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