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19thMarch

Stamps.com Coverage Initiated With Strong Buy Rating

StampsStrong Buy
12 Month Target $20.00

Before heading into any analysis of Stamps.com’s (STMP) financials or business prospects, it is necessary to clear up any misconceptions that the .com portion of their name may create. This is not a typical internet company, nor should it be valued as one. As the seller of a boring product with limited growth potential, Stamps.com is better looked at as a retailer with modest but above average growth rates.

Through an agreement with the United States Postal Service, Stamps.com enables customers to directly purchase and print out approved postage right from their homes or offices. The majority of their revenues are derived from their PC Postage service, which allows customers to print out postage in the form of a bar-code, generating $16.9 million in sales in the most recent quarter, an increase of 15% over the prior year’s comparable period. PhotoStamps, a service patented by Stamps.com, accounted for the rest of the company’s revenue and is the faster growing segment, generating sales of $8 million in Q4 2006, an increase of 35% versus Q4 2005. As a whole, Stamps.com reported sales of $25 million and net income of $4.7 million or $0.20 per share in the 4th Quarter and earnings of $0.69 per share for the full year 2006.

Selling a boring product and nothing more, this is a rather boring company. That is not a bad thing. With boringness comes consistency. Unless we wake up to one day find mail obsolete in our country within the next few years, this is a company with a strong recurring customer base that should continue to expand as more and more individuals and businesses discover the ease at which they can purchase their postage without leaving their homes or offices. Competition would be hard pressed to find competitive advantages over the service Stamps.com offers, given the virtual absence of ability to undercut Stamps.com’s prices, as postage sells at a fixed rate determined by the United States Postal Service no matter who the reseller is. Given these facts, Stamps.com does not appear to be at risk of experiencing declining revenues or rapidly eroding gross margins in the foreseeable future.

The strength of Stamps.com balance sheet is extremely noteworthy. With a market cap of only $323 million, the $106 million of cash of their balance sheet represents an amount equal to over $4.65 per share and to nearly 1/3 of their current market value. The company is using this large cash position to benefit shareholders through a recently authorized $20 million share repurchase plan, on top of an already completed $32 million in share buybacks since 2005. Stamps.com is currently expecting 2007 revenues of $90 to $100 million and earnings per share between $0.70 and $0.80. Given the authorized buyback in place, they are positioning themselves to come in at the high end of that earnings range. As mentioned previously, this company is more appropriately valued as a retailer than an internet company, considering they operate in a very contained niche. Taking this into account, a P/E of 20 is justifiable for a retailer with above average growth rates, especially considering their web based business is less capital intensive allowing for greater retained earnings than a typical brick and mortar retailer. By using an earnings target in the middle of company released guidance, $0.75, and applying a multiple of 20, we arrive at a fair enterprise value of $15.00 per share. If their buyback enables them to hit the high end of their guided range, $0.80, an enterprise value of $16.00 is fair. Add in $4 per share in cash, and we arrive at a fair market value of $20.00 within the next 12 months.

Disclosure: Joseph Urgo does not have a position in Stamps.com.

11 Comments

Jonathan Lubar says 20th March @ 11:19

I noticed that there is a single earnings estimate for 2008 of 55 cents — obviously a big decrease from 2007’s expectated earnings. I’m guessing that that might be due to STMP having to pay full-rate income taxes. If that’s the case, would you be multiplying 55 times your PE of 20 and be at risk of the stock dropping to $11? This consideration is all that is keeping me from buying it.

Joseph Urgo says 20th March @ 12:36

I believe the estimate you are referring to is outdated, therefore no longer accurate. Stamps.com has a net operating loss carryforward of approximately $269 million and $199 million for federal and state income tax purposes as of December 31, 2006, which can be carried forward to offset future taxable liabilities. The Company’s federal net operating losses will not begin to expire until 2018, while some of their state net operating losses began to expire in 2006. Based on this information, I do not expect Stamps.com to have to pay full-rate income taxes for quite some time.

Should their earnings drop to 0.55 and maintaining a P/E of 20, the company would be fairly valued at $15, as their large cash position must be considered. However, with the absence of some unforseen event having an extreme adverse effect on their operations, earnings should not drop to such a level.

Jeremy Sprout says 23rd March @ 12:08

I’m seeing their current cash balance as $33 million, which would represent about 1/10 of the current market value. Where did you get the $106 million?

Joseph Urgo says 23rd March @ 22:06

The $106 million figure comes from their most recent balance sheet which can be found in their 10-K filed on March 16th.

Mike Lee says 1st April @ 21:01

I believe the companies earnings guidance includes interest income from the large cash balance. As a result, you’re really double counting the cash (i.e., you applying a 20x p/e on the interest income generated by the cash and also adding back the full cash balance. A fairer presentation, you need to adjust the EPS backing out interest income.

Joseph Urgo says 1st April @ 21:31

The cash exists on their balance sheet as an asset. While most companies do not generate a significant amount of income from interest on their cash balances, they do generate their profits from the other assets that are represented on their balance sheet. The fact that one of the assets that Stamps.com generates income from is their cash balance, doesn’t change the fact that it is ultimately reflected exactly the same as income from operations are on the company’s bottom line. Considering this, I do not view this as grounds for an EPS adjustment, although I respect your opinion on the matter.

Hal says 8th April @ 11:45

Mike Lee’s point seems more valid…. You can value a company on its asset value, or you can value it on its earnings value. But, you can’t just combine those two to arrive at fair value for the enterprise. Interest Income should certainly be backed out of the income statement, if you plan on adding back balance sheet cash to get a total firm value.

Joseph Urgo says 8th April @ 17:55

It is an asset that creates both asset value and earnings value, therefore I don’t see the need to back it out.

steve stalker says 20th April @ 12:13

What do you think the forever stamp effects will be on their busines?

Joseph Urgo says 22nd April @ 23:39

I dont see this initiative as having a huge effect on Stamps.com. Their margins on the stamps they sell will be similar with or without the emergence of the Forever Stamp.

Hal says 26th April @ 10:43

lets take an extreme example according to your logic… A stock has $100mill in cash. there is no operating business and no expenses associated with the stock however. By your rationale, you would pay $100mill, plus some multiple of the interest income. That’s just silly. If you’re willing to do that, I’ve got a few $100s that i’ll sell you for $110.

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