Pitney Bowes (PBI) shares surged over 20% Thursday after the company turned in Q4 results that were better than expected. Pitney Bowes reported adjusted net income of $0.56 per share, beating the average analyst estimate of $0.51 by 10%. It met the average revenue estimate of $1.29 billion.
While these numbers are hardly earth-shattering, Pitney Bowes had very low expectations coming into this announcement. A dividend reduction was feared, though the company kept the quarterly current dividend of $0.375 per share intact.
Also helping in Thursday's surge was the massive amount of short interest in this stock. As of 1/15/2013, Pitney Bowes had nearly 30% of its shares shorted. Pitney Bowes also saw massive amounts of OTM puts being bought by speculators this month. Thursday's massive rally was undoubtedly helped by tons of short-covering.
I have previously written about the safety of the dividend for Pitney Bowes and considered it relatively safe. Pitney Bowes generates large amounts of cash flow and can easily afford to pay its dividend from this cash flow. Pitney Bowes generated full year 2012 free cash flow of $769M, while dividend payments were only $300M.
During the conference call, new CEO Marc Lautenbach hinted about a strategic review when he stated "I'm going to have a lot more to say about the company, and our going forward plans at our investor briefing end of May.". If Pitney Bowes decides to invest large sums into new capital spending and projects, this is in my opinion, the main future risk I see to the dividend.
Pitney Bowes' 2013 guidance was fairly upbeat. Revenue, excluding the impacts of currency, is expected to be in the range of flat to 3 percent growth when compared to 2012. Free cash flow is expected to be in the range of $600 million to $700 million. Earnings per share from continuing operations is expected to be in the range of $1.85 to $2.00. Revenue growth at Pitney Bowes is a welcome change, as revenues have declined every year since 2008.
Thursday was a good day for income and value investors. However, I firmly believe that one should take profits after having such a large gain. With Thursday's move, the stock is now up 30% YTD. Pitney Bowes is now trading where it did before the sharp decline after Q3 earnings.
Many shareholders of Pitney Bowes stock are still underwater, as Pitney Bowes was trading at a much higher level throughout 2012. While we may see some more short-covering, I believe that the upside is now limited. Pitney Bowes will probably be range bound till its next earnings report and/or its investor day in May. Thursday I sold covered calls on most of my position in Pitney Bowes. I may buy them back if they decline in value, but I think they very well may expire worthless.
Disclosure: I am long PBI.
Additional disclosure: I have covered calls written against most of my Pitney Bowes (PBI) position, and may open/close a position at any time.