Investment Summary
I started looking
at Pitney Bowes a few months ago, around the beginning of Q3 2020 and was
interested in their massive balance sheet that caught my eye. I ended up reading
around about the company's history and products, and ended up finding a compelling investment case given how little the market seemed to care about PBI's eCommerce activities. Now, after
a 50% run-up, I’m finally taking the time to jot down a few ideas about the business,
which I find fairly priced at the moment.
Basically, the
way I see it, an accelerated ramp-up of the Global Ecommerce unit could unlock
further upside if the EBIT run-rate (guidance of 8-12% EBIT Margin) is reached before
2026. Taking conservative assumptions on the other business lines by
extrapolating long term trends, a 6-year timeline to normalization implies the
stock is fairly priced at around 1.6$b market cap, with a normative FCF slightly
higher than 150$m in my base case.
At
current prices, the recommendation is thus a Hold. Closely monitoring the
evolution of the different business lines post Covid to fine-tune my growth
estimates and possibly exploit attractive entry points should the optics change
materially in the next few quarters.
Despite the
steep price rally around the announcement of Q420 results, I believe that the
stock may have some juice left in the case of an accelerated ramp-up. Alternatively,
it may come from a slower-than expected decline in SendTech, but I consider that
scenario less likely.
Pitney Bowes in brief:
Pitney Bowes is
a >100 years old company originally created by 2 business men, Pitney and
Bowes (who could guess ?). The company was originally built around a single
product, a metering machine for mail. Through the 20th century, the
company had to adapt and managed to emerge as a technological leader in
mail-related solutions, being at the front of successive innovation waves. At
the end of the 50s, the group faced an antitrust lawsuit and was forced to
offer free licenses for its products to competitors, but managed to stay afloat
thanks to its commercial relations.
Between the 1960s
and the 1980s, Pitney Bowes entered the Copy market, the payment terminal market,
the leasing market, launched a partnership with Ricoh for photocopiers… With
each iteration of its strategy, PBI chose to enter new markets by leveraging
strategic partnerships to quickly reach scale.
Since 2000, the
diversification strategy went into different directions, which have generated
mixed results. The company tried to enter the CRM market and the software
market, but ended up reselling those activities during the 2010s (2017 for the software
activity).
→ The business
is split in 2 main segments, Global Commerce and SendTech Solutions
SendTech
Solutions is the legacy segment of Pitney Bowes, linked to mail-related
activities. It encompasses different business lines. Technology Solutions
offers different services for sending physical and electronic mail, parcels,
buying supplies… The value proposition is to give professionals solutions to
send, trace and receive mail and/or parcels. Some of these services are
delivered through an open-platform which works with multiple service providers
and allows the client to get the best price. The Financing unit leverages
the group’s internal bank to sell metering machines through leasing. The firm
also finances equipment from other firms, in a mix-and-match approach aimed at
improving flexibility and client satisfaction over the long term. Support
Services are delivered both on-site and online under the form of
maintenance contracts. Not much details about the amounts, duration…
Despite the continuous
erosion of the professional mail volumes, SendTech remains a very lucrative unit,
with EBIT margins consistently above 30%. The online offerings play a major
role in this success and saved the show during the worst hours of the covid
crisis. As of Q2 20, as much as 2/3rd of supplies orders came in
through the online platforms.
Global Commerce is the newest segment dedicated to ecommerce activities and the mail
pre-sorting business. Inside this big unit, Global Ecommerce handles all
activities linked to ecommerce.
This includes Domestic
Delivery services, which combine a proprietary technology for parcel
returns and a dense network of last-mile warehouses; Cross-Border Solutions,
which houses a multitude of services facilitating international commerce; Shipping
solutions, software solutions offered through APIs.These different
businesses have been consistently loss-making, because of the need for scale to
reach profitability. In 2019/2020, 4 warehouses significantly improving
capacity have been delivered. This is the hidden gem, as we are talking
about a 1.5$bn business that could reach a run-rate EBIT margin of 8-12% in the
next few years!
Other than
Global Ecommerce, Global Commerce also houses Presort Services, which is
some weird combination between, SendTech and shipping. US Postal Services offer
some form of subcontracting for bulk mail, where companies who bring them pre-sorted
mail get a discount on the stamps that they can pass partially to their
customers. Pitney Bowes is one of the main actors in this space and is able to
gather enough mail on a daily basis to make it a profitable activity. Despite
the headwinds that mail volumes face, the main actors in the space are still
growing as they absorb the additional volume coming from smaller actors that
are pushed out by the shrinking base. The profits from this activity alone were
enough to finance the Ecommerce ramp-up in previous years, effectively making
it difficult to read the profitability of the different segments.
Topline & margins guesstimates
Global Ecommerce is still in ramp-up phase as noted above. Current price in my opinion
reflects a timeline of 5-6 years to reach the run-rate EBIT Margin of 10-12%.
Presort Services unit is caught in between opposite trends. Thanks to its extensive
network, Pitney Bowes is still able to amass enough mail on a daily basis and is
able to monetize the First Class Mail pre-sorting. Since First Class Mail has to
be delivered every day, it eliminates competition from the smaller actors that
may not reach the threshold to obtain a discount on some days, in turn making
their clients more likely to go upstream to a bigger player… When it comes to Standard
Mail, since it has to be sent every 2-3 days, smaller actors can still compete,
but the steep reduction in mail volumes (-5% CAGR) is here also pushing the smallest
actors out of the market. All in all, despite the volume fall, the strongest
actors are still able to juice some organic growth out of this market by
gaining market share :
In total, I estimated a very
low single digit growth (2% until 2022 and then 1% until 2026) and margins
staying around the 3-year 2017-2020 average of c.13% for the pre-sorting
business.
SendTech
Solutions is the legacy activity of Pitney Bowes and thus a
very mature activity. Margins are very steady but the business is facing a
rapid decline (even though some could argue that there would be additional
upside from a slower-than expected decline). I estimate the margins to be in
line with their 3-year 2017-2020 average at c.32%. When it comes to the
topline, my base case is again to take the 3-year decline CAGR of -6.5%. This
is another figure that ought to be monitored closely, given that SendTech currently
accounts for ~80% of PBI’s EBIT.
Main risks identified
- Execution risk in Ecommerce: Ramp-up
may never materialize, which could send the stock nosediving given the weight
that future ecommerce prospects bear in the current price
- The SendTech vulnerability: I talked about
SendTech being another potential pocket of value, but I ventured less in this
scenario as 1) I am sceptic about the probability of seeing the decline pace
decreasing significantly and 2) I am also wary of the deeply regulated nature
of the business (dependent on postal regulations and operations, on the
contractual relationship with USPS)
Catalysts
- In the short term, further re-rating when PBI starts getting viewed less
as a mail company and more as an eCommerce company
- Quicker than expected ramp-up in ecommerce profitability
- Slower than expected decline in SendTech revenues significantly boosting
FCF
- Spin-off of the eComm activities which according to other investors
having done the napkin maths could be worth ~$12 a share in standalone
Disclaimer : Long PBI
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